Zurich’s Climate Director calls on Insurance industry to expand its role to help manage risks related to climate change.
“Insurance is key to maintaining resiliency, but given the increased risks due to climate change, it is not the only tool that society should be relying upon,” said David Edsey, Climate Director for Zurich North America, during a discussion about insurance and resilience at ResCon, an annual conference on the practice of resilience and disaster management. Three additional ways to make communities more resilient to climate change were discussed at the event.
To demonstrate the challenge many individuals, businesses and communities face after weather-related disasters, Edsey shared data to explain the “insurance gap,” the amount of uninsured losses in a disaster event. For example, of the roughly $145 billion of natural hazard losses in the United States in 2021, only $85 billion was insured.1 That insurance gap can be much higher depending on location. For example, it is estimated that just 27% of U.S. homeowners have flood insurance, according to Insurance Information Institute, Inc.2
Another issue to consider is that it’s expected that losses from climate disasters are going to continue to increase as average temperatures climb to 1.5 degrees Celsius above pre-industrial times by mid-century. For example, it’s predicted that the droughts and wildfires in the West will become more frequent and severe; and because the warming atmosphere holds more moisture, storms and flooding events will continue to get worse. This growing intensity of natural hazards has already and will continue to increase the cost of property insurance, which will only further increase the insurance gap.
Edsey continued, “Insurance alone is not going to be the answer. There’s an insurance industry need to expand its role from purely providing risk transfer solutions to also providing services to help customers mitigate risks.”
Edsey, along with Lindene Patton, Chief Operating Officer for divirod, and Roy Wright, President & CEO for Insurance Institute for Business & Home Safety, identified three ways to improve resilience beyond insurance and help close the insurance gap:
1. Seek guidance to manage climate risk
Those responsible for managing risk, including risk managers, should consider seeking climate risk prevention consulting services. “It’s not only about managing present day risks anymore as the climate is changing," said Edsey. “For new locations and even existing locations, companies need to think about what the impact of climate change will be on risks 20 to 40 years from now. The historical data the industry has been relying on to measure risk is becoming less useful as the climate changes.”
Zurich created Zurich Climate Change Resilience Services to help its customers, who are mostly companies, protect against the growing risk of natural hazards. This is a Risk Engineering service that helps customers better anticipate natural hazard risks, quantify exposures and take actions to minimize loss. The information fueling the service uses Zurich’s own natural hazard models combined with forward-looking climate change models. With these insights, Zurich’s Risk Engineers work with customers to identify their most critically exposed property sites and risks, not only for their own locations but also for their entire supply chain. Zurich's engineers will then recommend physical and organizational protection measures to help customers avoid or minimize losses.
The risk data Zurich provides can also be used by its customers for their climate risk Task Force on Climate-Related Financial Disclosures (TCFD) and Securities and Exchange Commission (SEC) reporting.
2. Build using stronger building codes to increase the physical resiliency of properties
To help close the insurance gap, development of modern and more effective building codes, especially in vulnerable areas, are key.
Wright said, “We are at a place where the right kind of investments, market nudges and pushes on the building codes can help those not just survive, but also thrive when these weather-related events come through.”
Fortified building standards are developed for the perils of wind and wildfire. According to Wright, the cost to build using these standards may not be as out of reach as people think. For example, he said a fortified roof for a single-family home may cost $700 to $800 dollars more, depending on location and size. On average, he said, the cost to build a house to the fortified standard adds 3% to 5%. He mentioned that there are variables to that average based on where a person builds. For example, Florida has one of the most stringent codes in the United States, so, he said, it might be only a 1% increase to build using the stronger fortified standard. He cited reports that show the Florida building code has reduced windstorm losses by up to 72%.
“We can’t change the storms that will hit,” said Wright. “But with use of the fortified standards, we can change whether or not people have a home to return to after they evacuate.”
3. Seek community-based catastrophe insurance coupled with nature-based risk mitigation
Edsey also spoke about an interesting multi-partner approach that combines natural resiliency solutions with community-based catastrophe insurance. Natural resiliency solutions, such as coral reefs, mangroves and coastal wetlands, all can greatly reduce coastal flooding damage from storm surge. Other solutions include levee setbacks with a wetland buffer zone and ecological forest management, which can reduce wildfire risk. The Nature Conservancy has actually done a lot of research in this space to quantify the risk reduction that these natural mitigation solutions can provide, and how that reduced risk can be used to create a lower-priced insurance product for an entire community, and then how that insurance savings can be used to maintain or finance the natural mitigation solution.
The takeaway for adopting climate change solutions beyond insurance
While insurance is a valuable resilience mechanism, it can have the unintended consequence of encouraging development in higher risk areas or disincentivizing property owners from implementing other protective measures. A natural disaster will expose society's insurance gaps, which may leave many unable to recover. By combining risk-reduction measures with insurance, society can better protect all strata of society and keep higher risks areas insurable.
1. “Hurricanes, cold waves, tornadoes: Weather disasters in USA dominate natural disaster losses in 2021.” Munich Re.
2. “Facts + Statistics: Flood insurance.” Insurance Information Institute. Accessed 2 June 202