Skip to main content
Article

Climate change ground zero

Reinsurance
Climate Risk and Resilience

By Paula Pagniez and Prasad Gunturi | January 8, 2021

The true, devastating economic risk created by increased flooding in Florida is still under-estimated, exposing a global need for systemic shifts in the way we protect assets vulnerable to climate risk.

The true, devastating economic risk created by increased flooding in Florida is still under-estimated, exposing a global need for systemic shifts in the way we protect assets vulnerable to climate risk, explain Paula Pagniez and Prasad Gunturi. The full economic impact of climate risk includes many hidden costs. And certain areas will experience these both sooner and more severely. One such place is Florida–the canary in the climate risk coal mine, dueto its particular geography. The geography of the Sunshine State –an expansive coast line, low elevation and porous limestone foundation –makes it vulnerable to flooding and makes adaptation challenging. With storm surge from hurricanes of increasing intensity and frequency projected to become more severe and tidal flooding more frequent, physical damages to Florida real estate will accelerate with the changing climate. Rising sea levels could also push saltwater into the fresh water supply and damage water management systems. Flooding batters revenues, The knock-on effects could be even greater. Florida’s real estate losses during storm surge from a 100-year hurricane event would be $35bn today, forecast to grow to $50bn by 2050, assuming no change in building stock. Devaluation of exposed homes could be $10–30bn in 2030, and $30–80bn by 2050. This could be even greater if climate hazards affect public infrastructure assets like water, sewage and transportation systems. Property values and the taxes associated with buying and selling real estate make up a sizable chunk of state and local budgets. So, the very governments tasked with protecting residents from extreme weather events will have less revenue to do so because of –that’s right –extreme weather. The price or availability of insurance and mortgage financing in high-risk areas could also be negatively affected. While mortgages can be 30 years long, insurance is repriced every year. This duration mismatch means current risk signals from insurance premiums might not build in the expected risk over an asset’s lifetime. This may lead to poorly informed decisions. The insurance market will have to adapt to the risk-adjusted cost of insuring properties that now face a much higher likelihood of floodsand hurricanes by pricing higher premiums for this coverage. Even homeowners not financially distressed may choose to strategically default if their homes fall in value with little prospect of recovery. Shortly after Hurricane Harvey hit Houston in 2017,the mortgage delinquency rate almost doubled, from about 7–14%. As mortgage lenders start to recognise these risks, they could change lending rates for risky properties or even stop providing 30-year mortgages. This would further damage homebuyers and thestate’s economy.

Greater resilience globally Research by US-based Climate Central provides a more global perspective of the impact from flooding, revealing the greatest effects will be felt in Asia, due to the number of people living in the continent’s low-lying coastal areas. Mainland China, Bangladesh, India, Vietnam, Indonesia and Thailand together account for roughly 75% of the 300 million people who will be living precariously in areas projected to be affected by coastal flooding at least once a year by 2050. In response to the scale of the myriad economic challenges presented by climate risk, it is estimated that $90 trillion needs to be invested worldwide in sustainable infrastructure by 2030, which will only be possible with a systemic shift in the way projects are financed to build resilience to climate change. The need for societal resilience to shocks has already been made clear by the COVID-19 crisis. Investment decisions made now will either lock in a global network of climate-resilient infrastructure or a collection of exposed assets that will make social and economic activity vulnerable to climate risk.

There are three critical barriers we must overcome in shifting toward a more climate-resilient economy:

  • Incentive structuresare limited by short-termism. There is a crucial need to support longer-term incentive structures that promote resilience, such as regulation and cost of capital, in their growing efforts to foster and reward an appropriate integration of physical climate risks in investment decision-making.
  • Climate risk data and analytics is needed in mainstream finance. Better data supported by sophisticated analytical tools is needed to properly assess and price climate risk, and to translate exposure into cash flow modelling.
  • Expertise must be shared across industries and the public sector. A collaborative approach focused on building consensus in areas such as analytical methods and financial materiality is pivotal.

Properly pricing climate risk in financial decision-making will entail aligning investment flows towards infrastructure capable of withstanding a changing climate. Equally important will be to put in place a methodology to quantify the economic and financial risks and benefits, providing a substantial incentive for financial markets to embed resilience upfront. With this in mind, the Coalition for Climate Resilient Investment (CCRI) launched last year with 35 institutions, including the WEF and the UK government, and $5 trillion in assets under management,and has since grown to include 53 members and $10 trillion in assets.

CCRI members have been collaborating to address the accurate pricing of physical climate risks in investment decision-making to support more resilient economies and communities worldwide. This is a good start. Alongside the physical impacts, climate change will continue to reshape every aspect of the global economy. With the stakes so high, the need to manage climate risk and support a more sustainable economy –from Miami to Kolkata –has become a strategic and financial imperative. Paula Pagniez is director, Climate and Resilience Hub at Willis Towers Watson and Prasad Gunturi is executive vice-president, CatastropheAnalytics at Willis Re. [Pullouts ]$50bn Florida’s projected real estate losses for a 100-year hurricane by 2050. Investment decisions made now will either lock in a global network of climate-resilient infrastructure or a collection of exposed assets that will make social and economic activity vulnerable to climate risk. 300m people worldwide may be seriously affected by coastal flooding by 2050.

Authors


Executive Vice President
Willis Re North America

Related content tags, list of links Article Reinsurance Climate Risk and Resilience
Contact Us