Insurance: Facing the Threats of Rising Natural Disasters While Driving Solutions to the Climate Change Challenge
UNEP Finance Initiative Members Underline Industry Role in Renewables to Current and Future Forest Carbon Projects
Poznan, 10 December 2008 - Weather-related natural disasters are now outstripping ones linked with earthquakes by an ever widening factor, the UN Environment Programme (UNEP) and insurers said today.
Thomas Loster, chair of Munich Re Foundation and a member of UNEP’s Finance Initiative, said: “Since the 1980s, earthquakes have risen by around 50 per cent but weather-related hazards such major floods have increased by as much as 350 per cent and those from wind storms have doubled”.
The rise, in the line with the kinds of forecasts by the Intergovernmental Panel on Climate Change (IPCC), are increasing risks for vulnerable communities and countries while putting strain on the global re-insurance and insurance markets.
A preliminary assessment of the costs and impacts of some key natural disasters, compiled by Munich Re’s NatCat Service, shows that the most costly event of 2008 was the earthquake in China in May.
However the largest numbers of significant disasters were weather-related by nine to ten with Cyclone Nargis, which hit Myanmar in May, claiming an estimated 84,500 lives.
It was thus the most deadly event of 2008 but also costly for the country triggering uninsured economic losses of $4 billion.
China suffered two major weather-related events too the worst of which was in January when extreme winter weather triggered losses of an estimated $20 billion followed by the May-June period when huge floods left a $2 billion loss tag.
Other significant events, the full details of which will come in Munich Re’s full report in 2009, included severe weather ones including typhoons in the United States.
In many ways 2008 proved to be a record-breaking year despite sea surface temperatures in places like the Caribbean being lower than in the previous years when, for example Hurricane Katrina struck the Louisiana coast in 2005.
Hurricane Fay set records by hitting the state of Florida a total of four times dumping almost 30 inches of rain on some parts of the state.
“Meanwhile Cuba suffered three hits this year and in total six hurricanes in a row all made landfall. Taken together these are really unusual, and record-breaking events,” said Mr Loster.
Achim Steiner, UN Under-Secretary General and UNEP Executive Director, said:” The re-insurance and insurance industry has for many years been on the front line in terms of climate change. UNEP has been working with the industry since 1992”.
“The industry is not only vulnerable to rising weather-related disasters however. It is also has an important role in the profitability and viability of many of the solutions- from creative insurance policies and products that can assist home-owners and businesses in at-risk areas up to new and innovative ones that cover operators of wind farms against unusually calm and economically challenging weather conditions,” he added.
Insuring a Renewable Future
UNEP for example has been working with Paris Re, a European company, to develop a cost-effective and tailored weather derivative in Mexico.
The wind resource, even in very windy areas, can vary as much as 10 to 20 per cent between years.
The policy, based on one developed for farmers in Mexico and in Ethiopia, triggers a payout to a renewable energy generator when wind levels drop below a certain predetermined level.
Eric Usher, Head of UNEP’s Renewable Energy Finance Unit, said: “Previous attempts at such instruments have often proven too be expensive to be utilized, costing operators as much as 16 per cent of their monthly revenues. In contrast the derivative developed for the market in Mexico is likely to be a in the range of 3 per cent making it much more attractive”.
UNEP is now working with a consortium of MunichRe, RSA Insurance Group, CarbonRe, and insurance companies from a number of developing countries to develop a Global Renewable Energy Insurance Facility.
The Facility, which is expected to be launched next month, aims to bring a wider range of innovative insurance and risk management products to assist the growth of renewables and clean energy in developing economies.
“Perhaps the biggest challenge to the industry’s creativity is now emerging - how to underwrite the profitability of carbon markets and carbon funding as it relates to forests,” said Mr Steiner.
Insuring Future Forests
Under the Clean Development Mechanism (CDM) of the Kyoto Protocol developed countries can offset some of their domestic emissions by funding projects such a renewable energy and certain types of forestry ones in developing countries.
But of the roughly 4,000 projects registered or in the pipeline of the Clean Development Mechanism, only 27 or 0.7 per cent are for “afforestation and refforestation” says a report issued today by UNEP FI.
The value of forestry credits or “Certified Emission Reductions” have been trading on forward markets at 2-3 Euros per equivalent tonne of C02, it says.
Credits for other kinds of CDM projects such as wind power and fuel-switching trade between 65 per cent and 80 per cent higher.
The report outlines a variety of challenges that need to be overcome, challenges that will become ever more pressing if Reduced Emissions from Deforestation and Forest Degradation (REDD) emerge as part of a new post-2012 global climate deal at next year’s UN climate convention meeting in Copenhagen.
Up to 20 per cent of current greenhouse gas emissions are as a result of deforestation and nations are mid-way through negotiations that could see developing countries paid to keep their forests intact.
However a wide variety of issues remain to be resolved not least how to ensure that a forest involved in such a scheme does not disappear overnight and release its carbon into the atmosphere as a result of say fire, floods or win storms.
Experts believe the insurance industry could play a key role in realizing the success of REDD.
A survey of 18 leading insurance and re-insurance companies in Canada, Europe and Japan underline the challenges and opportunities.
Currently, 40 per cent of those questioned said they were involved in forest insurance at some level and in some countries covering perils ranging from fire to damage from snow, hail, pests, wind storms and earthquakes.
However the vast majority are cover private, commercial or industrial forests rather than the public or natural ones which would be part of a REDD regime.
This is because privately held forests tend to have sophisticated risk management systems in place such as fire-fighting personnel and equipment.
The survey also found that unlimited or catastrophic losses are a key concern for the industry in terms of the forest sector but that firms are now increasing the development of new kinds of products.
Long standing, state-run forest insurance schemes do operate in countries such as Norway which could provide a key to the kind of public-private insurance partnerships that might unlock the potential of any future REDD regime.
Paul Clements-Hunt, Head of UNEP FI, said: “Forests have so far made a totally insignificant contribution to the overall CDM projects despite the enormous potential to contribute to not only combating climate change, but triggering significant financial flows to developing economies”.
“Our new report and survey indicates that hybrid, public-private insurance solutions may well be needed to kick-start the forest carbon market and to support the multi-trillion dollar potential of the reduced emissions from deforestation agenda that may emerge in 2009”.
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