The insurance sector is struggling to manage escalating risk for society as the cost of climate change begins to bear down in the form of more frequent and severe weather events.
Total economic losses from natural disasters such as floods and storms have increased fivefold since the 1980s to around $170 billion today. More worryingly, over the same period the gap between those total losses and the value insured has quadrupled from $23 billion to $100 billion.
The new data was outlined in two new reports published this week by ClimateWise, an industry coalition of 27 of the world's largest insurers, in collaboration with the University of Cambridge Institute for Sustainability Leadership (CISL).
Addressing this "protection gap" and finding an equitable way to provide insurance for the most vulnerable assets in society is crucial if the insurance sector is to remain a respected industry in the future, warned Maurice Tulloch, chairman of global general insurance at Aviva and chairman of ClimateWise.
"Put simply, the protection gap is the economic divide between total economic losses and insured losses," he said at the reports' launch. "These figures starkly illustrate the growing threat of climate change. And while Paris potentially promises to slow the impacts of climate change by limiting global warming to 2 degrees by 2050, the near-term impact of continued severe weather is significant, and will have a profound impact on the investments, growth and general socio-economic outlook."
Bank of England Governor Mark Carney agrees. In September he warned insurers are heavily exposed to climate risks and that time is running out to deal with global warming. In one of this week's reports, "Closing the Protection Gap," he reiterated the warning. "Over time, the adverse effects of climate change could threaten economic resilience and financial stability," he said. "Insurers are currently at the forefront."
The insurance industry urgently needs to develop new strategies to deal with the climate risks presented by a rapidly warming planet, Tulloch explained. "The prevailing theme of 2016 has unquestioningly been the protection gap," he said. "With this in mind, it's important to focus on how we as an industry can collectively respond to the risks and opportunities that presents."
Technological progress is likely to further widen the protection gap in the future, he warned. Big Data — also known as predictive analytics — is helping insurers become increasingly accurate in their ability to pinpoint the exact level of risks faced by assets across the country. The technology allows insurers to be more precise in the charges they levy, potentially saving customers money, it also makes them more aware of the risk faced by the most vulnerable assets.