Climate risk insurance can be an effective tool for mitigating economic losses caused by extreme weather events and other climate-related hazards. The insurance industry has been working to develop products that can help individuals and businesses cope with the financial impacts of climate change.
One way climate risk insurance can help is by providing financial protection for people and businesses that are affected by natural disasters. For example, a farmer whose crops are destroyed by a flood or a business owner whose property is damaged by a hurricane can receive financial compensation through an insurance policy. This can help them recover from the loss and get back to their normal operations as quickly as possible.
Climate risk insurance can also help governments and organizations manage their exposure to climate-related risks. For example, a government might purchase an insurance policy to protect against the financial impacts of sea level rise on its infrastructure. This can help them manage their budget and plan for the future more effectively.
Global warming is expected to result in an increase in the number of particularly powerful hurricanes in the United States. This has the potential to significantly increase the economic losses caused by these storms. Better insurance could effectively mitigate the economic losses caused by climate change. This is demonstrated in a new study conducted by the Potsdam Institute for Climate Impact Research on the effectiveness of climate risk insurance in the United States.
Hurricanes in the United States caused more than $400 billion in direct economic losses from 1980 to 2014, with losses peaking at more than $150 billion in 2005, the year Hurricane Katrina made landfall. “Following severe storms that cause significant direct economic losses, the economy may take several years to recover, and a full recovery may not always be possible between subsequent severe storms. Our model takes into account the long-term effects of tropical cyclones on economic development, which can be far greater than the immediate effects “explains Christian Otto, a scientist at the Potsdam Institute for Climate Impact Research (PIK) and one of the study’s lead authors, in the scientific journal Science Advances.
Our findings show that comprehensive, tax-financed climate risk insurance accelerates economic recovery and is thus an effective tool for mitigating the economic losses caused by climate change.Kilian Kuhla
Economic growth losses from hurricanes could more than double in the US
“There is widespread scientific agreement that as global warming continues, the proportion of the most powerful hurricanes will increase. According to our computer simulations, hurricane-induced economic growth losses in the United States could more than double compared to the historical period, even if global warming is limited to less than 2° Celsius in accordance with the Paris Climate Agreement. Without drastic reductions in greenhouse gas emissions, this level of warming could be reached as early as the middle of this century” PIK-scientist Kilian Kuhla, the study’s other lead author, emphasizes.
The authors also assess the effectiveness and limitations of insurance as an adaptation strategy in their study: “Our findings show that comprehensive, tax-financed climate risk insurance accelerates economic recovery and is thus an effective tool for mitigating the economic losses caused by climate change. Implementing such an insurance scheme in the United States could compensate for the expected increase in hurricane-induced growth losses, at least if global warming is limited to 2° Celsius “Tobias Geiger, co-author and scientist at the German Weather Service and PIK, explains.
This finding may also fuel the ongoing debate in Germany about whether natural disaster insurance should be made mandatory to combat the intensification of extreme weather events caused by global warming.
National insurance mechanisms insufficient in strongly affected developing countries
However, the study concludes that, even in the current climate, national insurance solutions may be insufficient to effectively mitigate the economic losses caused by extreme weather events in the most vulnerable developing countries. The study shows that even if climate risk insurance were as developed as it is in the United States, growth losses would still be six times higher in Haiti, a small island developing state heavily impacted by hurricanes.
“Our findings highlight the importance of international climate finance in assisting severely impacted developing countries to cope with the effects of climate change. Furthermore, climate risk insurance should be accompanied by a diverse set of other adaptation measures, such as investments in higher building standards and resilient infrastructure” Christian Otto explains.
The authors stress that in addition to climate adaptation, a rapid and massive reduction of greenhouse gas emissions is key to mitigate climate change-induced losses in the long-run: “Current climate protection policies are insufficient to meet the agreed ‘well below 2°C’ warming limit but may rather lead to 2.7°C of warming. In consequence, US growth losses could more than double compared to a Paris-compatible 2°C scenario and increase more than sixfold compared to the historical period,” says Katja Frieler, head of the research department Transformation Pathways at PIK and co-author of the study.
In addition, climate risk insurance can help incentivize individuals and businesses to take steps to reduce their exposure to climate-related risks. For example, if a homeowner knows that they will be able to obtain insurance at a lower cost if they make their home more resilient to extreme weather, they may be more likely to invest in such improvements.
However, Climate risk insurance alone is not the solution to the problem of economic losses caused by climate change. It is important to also focus on reducing greenhouse gas emissions and building more resilient communities, as well as to continue to educate people about the impacts of climate change, to prevent the losses in the first place.
Overall, climate risk insurance can be an important tool for helping individuals, businesses, and governments manage the financial impacts of climate change. But It has to work together with other actions to address the issue.