Ostrich in the regulatory sandbox!


‘The natural and human-made reasons specific to India make it particularly vulnerable to the climate crisis’, tells me climate scientist and physicist Dr. Chirag Dhara in a recent interaction. The underlying findings ought to wake up the insurance industry. Rather than continue getting carried away by the quest for linear growth, it must accept the life-threatening ramifications of ignoring the warnings.

‘High baseline summer temperatures, its varied geography over a vast area, a heavy dependence of agriculture on stable monsoons and a coastline stretching 7000 km are some’. The list goes on. ‘Runaway pollution, unplanned development, a large informal economy, deforestation, insufficient disaster-preparedness, and a significant proportion of its population living in poverty are other factors adding to India’s unique vulnerability’, highlights Chirag.

‘Humid heat is much more dangerous than dry heat, and a simultaneous spike in heat and humidity can significantly raise the risk of cardiovascular and neurological conditions. In fact, the deadly heatwaves in the summer of 2015 across India and Pakistan, with high fatalities, were a result of the combination of high temperature and humidity that lasted several days’, he says.

Melting glaciers, floods, dry spells – where would the displaced population move? Would insurers continue in a business as usual mode?  Will property fairs continue in increasingly submerging Mumbai, Kolkata, Chennai? Should growing intensity of cyclones on both east and west coasts be ignored? A potential Fukushima like scenario in Mumbai is not a work of fiction by author Amitav Ghosh. He invokes serious science. 

What’s cooking in the world’s largest market?

It takes an eminent climate activist Bill McKibben, of 350.org fame, to own climate risk thought leadership. Insurers have abdicated this space as of now. People are dying from heat and heatwaves; he shares the learning from the US. It’s called a “silent killer,” because we record these illnesses and deaths as something else – like kidney failure or heart attack. Heat is killing more people in the U.S. than floods and hurricanes combined. Heat is the mothership of climate risk – it exacerbates hurricanes driven by warmer air and warmer water, drought, and desertification, devastating and cataclysmic wildfires, food insecurity, water shortages, increased violence, and immense economic loss. 

Global economic costs of reduced productivity could reach two trillion dollars by 2030. From 2002 through 2009, the U.S. health-related cost of heatwaves was $5.3 billion. Insurance that covers heat impacts right now is in the life, health, and business-interruption product lines. Property and casualty insurance for heat is virtually nil, says McKibben.

Wakeup call

Unlike many European insurers, most U.S. players remain addicted to fossil fuel – both as insurers and investors. Thankfully, some regulators are waking up. New York State Department of Financial Services, for instance, recently highlighted the accelerating cost of climate-related natural disasters. The ten hottest years ever recorded, it reaffirms, have all occurred since 1998, with 2020 likely to be among the hottest. 

In May 2020, the concentration of carbon dioxide in the atmosphere increased to the highest level ever recorded in human history. This year’s record-breaking wildfire season on the West Coast, it says, is yet another reminder of the devastating consequences of climate change. The aggregate cost of billion-dollar natural disasters in the US, it says, more than quadrupled from the 1980s to the 2010s. 

For every one-degree Celsius increase, the combined value of market and nonmarket damages across the US economy is about 1.2% of gross domestic product. Globally, ‘the damages from climate change [will] amount to almost 3% of GDP by 2060.’

‘Our whole society would just shut down and too many people would suffer,’ warns Climate leader Greta Thunberg. There is a serious urgency to achieve a scale and speed of emissions reductions to keep global temperature close to the limit set by the Paris climate agreement. The insurance fraternity must quickly align to this goal. This ‘cannot be achieved by the normal operation of society’ reminds Greta.

Climate change is one of the most critical risk-management issues of our generation.  Financial risks from climate change are unprecedented. Unlike other financial risks, they are global in scale and scope and cannot be contained regionally or diversified away. Many large insurance companies, particularly the European, are looking to integrate climate considerations into their governance, risk management, business strategies, and operations, and are setting related metrics and goals. 

Having joined the insurance industry at the height of the cold war, designing a cover against a possible nuclear war was a popular debating topic during our training. The prize-winning response – don’t you worry – there will never be a claim – we will all be dead anyway! 

A potential nuclear holocaust is hopefully behind us. The Climate Crisis is like a frog in steadily heating water. The way we visualise or mitigate risk; design our regulations, products, reinsurance, price or reserve a risk, account and disclose, educate our workforce – as we approach the boiling point – our actions will render the products redundant and business models unsustainable. The industry risks outliving its utility. The challenge beckons us to the drawing board. The regulatory sandbox could be an opportunity. But not as an ostrich!

DISCLAIMER : Views expressed above are the author’s own.

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