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Projected Effect on Insurance and Other Financial Services
The costs of ordinary and extreme weather events have increased rapidly in recent decades. (See Figure 1.) Losses have gone from 3.9 billion US$ per year in the 1950s to 40 billion US$ per year in the 1990s worldwide. About one-quarter of these losses occurred in developing countries. They rose from a negligible level to 9.2 billion US$ per year. The ratio of global property/casualty insurance premiums to weather-related losses fell by a factor of three between 1985 and 1999. .
Even though people are better prepared for disasters and countries are working to strengthen their infrastructure, the costs of weather events keep going up. Two major factors in the upward trend in disaster losses are:
- socioeconomic, such as population growth, increased wealth, and urbanization in vulnerable areas.
- climatic, such as the changes in precipitation and flooding events.
Changes in weather-related events linked to climate change will increase the uncertainty in insurance risk assessment. Insurance premiums will rise. This could lead to some risks being reclassified as uninsurable. Increased insurance costs and slow the expansion of financial services in developing countries could result. Insurance would be more difficult to get, and therefore demand for government-funded compensation following natural disasters will increase.
The financial services sector as a whole is expected to be able to cope with the impacts of climate change. Rare severe events, however, can affect parts of the financial services sector especially if they are already hurting from non-climate factors such as adverse market conditions. This means reduced profit and even bankruptcy for smaller companies. The effects of climate change will likely be greatest in the developing world. It will particularly affect countries that rely on primary production (farming, raising animals)as a major source of income. The GDP (Gross Domestic Product) of some countries is affected by of natural disasters. (The GDP is the total value of goods and services produced by a nation over a given period, usually one year.) Damages can be as high as half of GDP.
There will be equity issues and limits to development, if weather-related risks become uninsurable, prices increase, or insurance becomes less available. Developing countries will need better access to insurance and more widespread introduction of micro-financing schemes and development banking.
Figure 1. The costs of catastrophic weather events per decade from the 1950s to the 1990s
ACTIVITY 1 Questions
1. Refer to Figure 1. The economic losses are in billions of US$ per decade. How many times greater is the cost of weather events in the 1990s compared with the 1950s?
2. a) The article states that the ratio of insurance premiums to weather related losses fell by “a factor of three”. What does a factor of three mean?
b) What does this change in the ratio tell you about insurance premiums compared to losses?
3. Refer to Table 1. Look at the “Type of Event Relevant to Insurance Sector” and “Sensitive Sector/Activities” columns. Identify and list the events that are likely to affect:
a) agriculture. How likely are the projected changes?
b) energy supply and demand. How likely are the projected changes?
Table 1: Extreme climate-related phenomena and their effects on the insurance industry: observed changes and projected changes during twenty-first century. Source: Climate Change 2001 Synthesis Report p. 257-8.