Climate risk can be cost-effectively averted
There is a simple but crucial difference between weather and climate. Weather describes individual combinations of phenomena such as temperature, precipitation, wind etc. as they arise and shift daily, even hourly. Climate, on the other hand, is the average weather over long periods of time – usually longer than 10 to 15 years.
This difference between the transitory, short-term character of weather and the long-term, average character of climate is key to understanding what is meant by climate change 1). Today, global warming is a fact. Since the beginning of industrialisation and the rapid growth of world population, man’s activities – along with natural variability – have contributed to a change of climate manifesting itself as a considerable increase in global temperature(2).
An economic view on adaptation is needed
Climate change has the potential to develop into our planet’s greatest environmental challenge of the 21st century.
Climatic trends continue to expose local populations to the mounting challenges and costs of protecting greater asset values against weather-related risks. These ranges from more frequent and severe storms, floods, droughts, heat waves and other natural disasters to sea level rise, crop failures, and water shortages(4).
As a major global reinsurer, Swiss Re is committed to taking a leading role in the climate debate. In a seminal study on the Economics of Climate Adaptation (ECA), Swiss Re and other leading organizations developed a methodology to quantify local climate risks and provide decision-makers with the necessary facts to design a cost-effective climate adaptation strategy(5).
ECA offers countries and local level decision-makers the facts and framework to design an adaptation strategy and to demonstrate the role of insurance risk transfer measures(6). Case studies in 17 different regions around the globe, ranging from Maharashtra in India to Florida and Northern England, showed that up to 68 percent of expected loss from climate change can be averted using cost-effective adaptation measures(7).
This difference between the transitory, short-term character of weather and the long-term, average character of climate is key to understanding what is meant by climate change 1). Today, global warming is a fact. Since the beginning of industrialisation and the rapid growth of world population, man’s activities – along with natural variability – have contributed to a change of climate manifesting itself as a considerable increase in global temperature(2).
An economic view on adaptation is needed
Climate change has the potential to develop into our planet’s greatest environmental challenge of the 21st century.
Climatic trends continue to expose local populations to the mounting challenges and costs of protecting greater asset values against weather-related risks. These ranges from more frequent and severe storms, floods, droughts, heat waves and other natural disasters to sea level rise, crop failures, and water shortages(4).
As a major global reinsurer, Swiss Re is committed to taking a leading role in the climate debate. In a seminal study on the Economics of Climate Adaptation (ECA), Swiss Re and other leading organizations developed a methodology to quantify local climate risks and provide decision-makers with the necessary facts to design a cost-effective climate adaptation strategy(5).
ECA offers countries and local level decision-makers the facts and framework to design an adaptation strategy and to demonstrate the role of insurance risk transfer measures(6). Case studies in 17 different regions around the globe, ranging from Maharashtra in India to Florida and Northern England, showed that up to 68 percent of expected loss from climate change can be averted using cost-effective adaptation measures(7).
Climate risk can be cost-effectively averted
One of the locations assessed in this manner by the ECA working group includes the city of Hull – an economically deprived area currently undergoing redevelopment that is located on the North Sea coast in one of England’s most vulnerable regions. While the United Kingdom is better adapted to climate risks than many other countries, extreme weather has the potential to cause significant economic damage. Situated at the confluence of two rivers, the city of Hull is under constant threat from freshwater flooding. But its low-lying coastal location also puts it at risk of wind storms and flooding from sea-level rise. Climate change is projected to increase the threat of all three perils and exacerbate damage to different types of assets (Figure 1).
One of the locations assessed in this manner by the ECA working group includes the city of Hull – an economically deprived area currently undergoing redevelopment that is located on the North Sea coast in one of England’s most vulnerable regions. While the United Kingdom is better adapted to climate risks than many other countries, extreme weather has the potential to cause significant economic damage. Situated at the confluence of two rivers, the city of Hull is under constant threat from freshwater flooding. But its low-lying coastal location also puts it at risk of wind storms and flooding from sea-level rise. Climate change is projected to increase the threat of all three perils and exacerbate damage to different types of assets (Figure 1).
Hull is therefore a poignant example of how a systematic risk management approach can help to reduce potential losses from multiple hazards and promote economic development in a region that exhibits a growing concentration of assets at risk from climate change.
The implication for local decision makers is that while Hull will benefit from efforts to strengthen current defences, securing the city’s regeneration path will require precautionary measures against the full set of potential hazards as well as a range of possible climate change scenarios, even the most extreme.
For disasters with a very low frequency, transferring risk rather than directly preventing the expected loss is likely to be the most cost-effective component of the city’s local adaptation portfolio. These measures include improving insurance penetration of public buildings and expanding an existing City Council scheme to encourage tenants in public housing to take on personal household insurance(9).
The implication for local decision makers is that while Hull will benefit from efforts to strengthen current defences, securing the city’s regeneration path will require precautionary measures against the full set of potential hazards as well as a range of possible climate change scenarios, even the most extreme.
For disasters with a very low frequency, transferring risk rather than directly preventing the expected loss is likely to be the most cost-effective component of the city’s local adaptation portfolio. These measures include improving insurance penetration of public buildings and expanding an existing City Council scheme to encourage tenants in public housing to take on personal household insurance(9).
Climate Change: Facts and Figures3
After the last ice age, i.e. for about 11 000 years, the earth’s climate remained relatively stable, with global temperatures averaging 14°C. But over the last century, the climate has started to change at an unusual rate. Firstly, the world’s average temperature has risen by 0.8°C since 1900 (Figure 2) and average temperatures in the first decade of this century have consistently been among the highest ever measured.
Secondly, precipitation patterns have changed significantly in different regions. And thirdly, extreme weather events have become more numerous and severe. Through extensive research and numerous studies, science has reached a far-reaching consensus on the causes underlying these changes. There is strong evidence that the observed rise in average temperatures has been caused by increasing concentrations of greenhouse gases in the atmosphere. These are gases such as carbon dioxide (CO2), methane and others that trap warmth in the earth’s atmosphere – a good thing in moderation but not in excess.
The atmospheric concentration of CO2, the most important greenhouse gas, has risen by 38% since 1850, from 280 to over 380 parts per million (ppm). This strong increase cannot be explained by natural variations alone. According to the scientific consensus it is "very likely”, i.e. with a probability of 90% or more, that this rise has been caused by human activity, primarily the burning of fossil fuels and agriculture.
Scientific models that take into account these additional emissions mirror the actual rise quite accurately. The Special Report "Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaptation” , 2012, by the Intergovernmental Panel on Climate Change (IPCC) lists significant projected changes in climate extremes for the 21st century:
● Very likely increase in the length, frequency and/or intensity of warm spells or heat waves over most land areas;
● Likely increase in the frequency of heavy precipitation events or an increase in proportion of total rainfall from heavy falls over many areas of the globe;
● Medium confidence in a projected increase in duration and intensity of droughts in some regions of the world;
● Very likely earlier spring peak flows in snowmelt- and glacier-fed rivers;
● Very likely that mean sea level rise will contribute to upward trends in extreme coastal high water levels;
● High confidence that changes in heat waves, glacial retreat, and/ or permafrost degradation will affect high mountain phenomena such as slope instabilities, mass movements and glacial lake outburst floods;
● High confidence that changes in heavy precipitation will affect landslides in some regions.
Secondly, precipitation patterns have changed significantly in different regions. And thirdly, extreme weather events have become more numerous and severe. Through extensive research and numerous studies, science has reached a far-reaching consensus on the causes underlying these changes. There is strong evidence that the observed rise in average temperatures has been caused by increasing concentrations of greenhouse gases in the atmosphere. These are gases such as carbon dioxide (CO2), methane and others that trap warmth in the earth’s atmosphere – a good thing in moderation but not in excess.
The atmospheric concentration of CO2, the most important greenhouse gas, has risen by 38% since 1850, from 280 to over 380 parts per million (ppm). This strong increase cannot be explained by natural variations alone. According to the scientific consensus it is "very likely”, i.e. with a probability of 90% or more, that this rise has been caused by human activity, primarily the burning of fossil fuels and agriculture.
Scientific models that take into account these additional emissions mirror the actual rise quite accurately. The Special Report "Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaptation” , 2012, by the Intergovernmental Panel on Climate Change (IPCC) lists significant projected changes in climate extremes for the 21st century:
● Very likely increase in the length, frequency and/or intensity of warm spells or heat waves over most land areas;
● Likely increase in the frequency of heavy precipitation events or an increase in proportion of total rainfall from heavy falls over many areas of the globe;
● Medium confidence in a projected increase in duration and intensity of droughts in some regions of the world;
● Very likely earlier spring peak flows in snowmelt- and glacier-fed rivers;
● Very likely that mean sea level rise will contribute to upward trends in extreme coastal high water levels;
● High confidence that changes in heat waves, glacial retreat, and/ or permafrost degradation will affect high mountain phenomena such as slope instabilities, mass movements and glacial lake outburst floods;
● High confidence that changes in heavy precipitation will affect landslides in some regions.
Prevention and insurance are mutually reinforcing America’s Energy coast - a strip of land comprising coastal Texas, Mississippi, Alabama and Louisiana - forms a major part of the US oil and gas industry. The US Gulf Coast already faces significant risk of hurricane wind and storm surge damage.
Climate change, combined with economic growth and land subsidence, could increase losses in the region by up to 65 percent over the next twenty years. Entergy Corp., America’s third-largest utility company, commissioned a study to assess the impact of natural hazards on the Gulf Coast’s economy. The study shows that a number of economically sensible adaptation measures are available to avert a large part of the damage.
Among the most attractive adaptation measures are improved building codes, beach nourishment and roof cover retrofits. And yet, while cost-effective prevention measures are available in different locations, no individual, business and public institution can afford to prevent losses from every conceivable risk event.
This is especially true for risks that are unlikely to occur or that can only be averted at an enormous cost. Risk prevention and risk transfer are mutually reinforcing. While insurance is a useful component in a given adaptation portfolio, keeping insurance prices in check by minimizing residual risks through prevention measures is equally important(10).
Climate change, combined with economic growth and land subsidence, could increase losses in the region by up to 65 percent over the next twenty years. Entergy Corp., America’s third-largest utility company, commissioned a study to assess the impact of natural hazards on the Gulf Coast’s economy. The study shows that a number of economically sensible adaptation measures are available to avert a large part of the damage.
Among the most attractive adaptation measures are improved building codes, beach nourishment and roof cover retrofits. And yet, while cost-effective prevention measures are available in different locations, no individual, business and public institution can afford to prevent losses from every conceivable risk event.
This is especially true for risks that are unlikely to occur or that can only be averted at an enormous cost. Risk prevention and risk transfer are mutually reinforcing. While insurance is a useful component in a given adaptation portfolio, keeping insurance prices in check by minimizing residual risks through prevention measures is equally important(10).
Public-private partnerships helps tackle flood risk in Brazil Once considered a natural disaster "safe zone”, Brazil is facing a strong and increasing threat of flooding that places people, infrastructure and business at risk. It is expected that both the occurrence and impact of flooding will increase in Brazil. During the period 1900-2006, floods accounted for 59% of natural disasters and landslides – which are often triggered by heavy rain and flooding – totalled 14%.
Climate change is likely to increase the frequency and severity of precipitation in the region, and this is a major cause of flooding. Social and economic losses will continue to increase due to rapid socio-economic development and an increasing concentration of people and economic activity in urban areas. The annual expected loss is estimated to rise substantially from USD 1.4 billion to USD 4 billion.
To avoid pitfalls in socioeconomic development it is essential to have comprising measures ranging from prevention to adaptation and risk transfer in place. In terms of addressing flood risk in Brazil today, emergency relief takes precedence over prevention measures. However, adaptation measures can be implemented to reduce the annual expected loss by over one third in 2030.
It shows that urban planning, enhanced building codes, drainage systems and hillside stabilisation projects avert more economic loss than what the costs associated to the measure are (Figure 3). Together with an early warning system and awareness raising this forms an integral adaptation portfolio. Not all losses are avoidable, especially low frequency – high severity events such as a 100 year flood event are optimally addressed by risk transfer. Given the country’s low insurance penetration, the bulk of the losses is financed from public and private budgets.
Pre-event financing through a variety of insurance schemes is a more effective way of handling flood risks compared to emergency relief financing. Strengthening the insurance market for homeowners and businesses, flood microinsurance schemes and innovative insurance solutions for the public sector are important ways to further strengthen the region’s resilience to climate risks(11).
The three ECA case studies reveal economic development and climate change as the key drivers for future climate losses. Additionally the cases in Hull, the US Gulf Coast and Brazil demonstrate that the adaptation portfolio comprises the whole range of measures and combines risk prevention and risk transfer together with public-private partnerships. Economics of Climate Adaptation presents a strong case for immediate action – start adapting is cheaper than to sit and wait.
Climate change is likely to increase the frequency and severity of precipitation in the region, and this is a major cause of flooding. Social and economic losses will continue to increase due to rapid socio-economic development and an increasing concentration of people and economic activity in urban areas. The annual expected loss is estimated to rise substantially from USD 1.4 billion to USD 4 billion.
To avoid pitfalls in socioeconomic development it is essential to have comprising measures ranging from prevention to adaptation and risk transfer in place. In terms of addressing flood risk in Brazil today, emergency relief takes precedence over prevention measures. However, adaptation measures can be implemented to reduce the annual expected loss by over one third in 2030.
It shows that urban planning, enhanced building codes, drainage systems and hillside stabilisation projects avert more economic loss than what the costs associated to the measure are (Figure 3). Together with an early warning system and awareness raising this forms an integral adaptation portfolio. Not all losses are avoidable, especially low frequency – high severity events such as a 100 year flood event are optimally addressed by risk transfer. Given the country’s low insurance penetration, the bulk of the losses is financed from public and private budgets.
Pre-event financing through a variety of insurance schemes is a more effective way of handling flood risks compared to emergency relief financing. Strengthening the insurance market for homeowners and businesses, flood microinsurance schemes and innovative insurance solutions for the public sector are important ways to further strengthen the region’s resilience to climate risks(11).
The three ECA case studies reveal economic development and climate change as the key drivers for future climate losses. Additionally the cases in Hull, the US Gulf Coast and Brazil demonstrate that the adaptation portfolio comprises the whole range of measures and combines risk prevention and risk transfer together with public-private partnerships. Economics of Climate Adaptation presents a strong case for immediate action – start adapting is cheaper than to sit and wait.
1 - Corporate Responsibility Report, page 64
2 - Our position and objectives http://www.swissre.com/rethinking/climate/our_position_and_objectives.html
3 - Corporate Responsibility Report, page 64 http://media.swissre.com/documents/2011_SwissRe_CorporateReponsibility_Rpt.pdf
4 - Weathering the impact of climate change
5- Strengthening climate resilience http://www.swissre.com/rethinking/climate/Strengthening_climate_resilience.html
6 - What does Economics of Climate Adaptation mean for insurance http://www.swissre.com/rethinking/climate/what_does_economics_of_climate_adaptation_mean_for_insurance.html
7 - Weathering climate change: Insurance solutions for more resilient communities, 2010 http://media.swissre.com/documents/pub_climate_adaption_en.pdf Weathering the impact of climate change http://www.swissre.com/rethinking/climate/Weathering_climate_change.html http://www.swissre.com/rethinking/climate/Strengthening_climate_resilience.html
8 - Swiss Re, Our position and objectives http://www.swissre.com/rethinking/climate/our_position_and_objectives.html
9 - Economics of Climate Adaptation (ECA) – A Factsheet on urban resilience http://media.swissre.com/documents/Economics_of_Climate_Adaption_UK_Factsheet1.pdf http://www.swissre.com/rethinking/climate/Hull_United_Kingdom_A_holistic_approach_to_multiple_hazards.html
10 - Building a Resilient Energy Gulf Coast http://media.swissre.com/documents/Entergy_study_exec_report_20101014.pdf http://www.swissre.com/rethinking/climate/Building_a_resilient_Energy_Gulf_Coast.html
11 - Staying on top of fl ood risk in Brazil http://media.swissre.com/documents/Staying_on_top_of_fl ood_risk_in_Brazil.pdf http://media.swissre.com/documents/Acompanhando_o_risco_de_inundacoes_no_brasil.pdf http://www.swissre.com/rethinking/natcat/Flood_risk_on_the_rise_in_Brazil.html
