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The insurance industry needs to weather climate change

By Sospeter Opondo

Kenya: Let us suspend debate over climate change and simply look at the reality of today’s weather: it’s changing, and not for the better. There have been, and will continue to be, more severe storms, floods and droughts.

In short, and from a business perspective: more costly disruption.

Business disruption means such things as unavailability or price spikes of key commodities or supplies, damage to company or key suppliers’ manufacturing facilities, loss of power to run facilities, shortages of fuel to power company vehicles, and destruction of key parts or inventory. Oh, and your customers and employees may be in dire straits.

Any of these things could put a company out of business. So, companies that insure against disruption are focused on the impacts of increasingly unstable weather, right? Well, maybe.

It is certainly a topic of discussion. There has been a succession of conversations, meetings and media events featuring companies, policy makers and others eager to strut their climate cred. And more than a few of them actually had some.

There are companies pushing their corporate (and municipal) clients to protect themselves financially against severe weather and other manifestations of changing climate.

This is no small matter. Last year, severe weather cost the global economy Sh13.9 trillion, with Sh6.1 trillion covered by insurance.

These things hit insurers hard. UAP Insurance two weeks ago paid out Sh15 million in compensation to 91 farmers who suffered losses following the drought that struck parts of the Rift Valley during this year’s long rains season.

On a global scale, floods in Thailand in 2011 wreaked havoc on several industries, causing more than Sh3.9 trillion in economic damage. Disruptions to manufacturing supply chains affected regional automobile production and caused a global shortage of computer disk drives, which lasted through much of last year.

Zurich Insurance Group downgraded its revenue targets after “natural catastrophe losses cut second-quarter profit by 27 per cent” in August.

It is also becoming painfully obvious to business — or, at least, some businesses — that the vast majority of assets are designed to withstand climate events of the past, not of the future.

At the most general level, risk management is getting a much higher degree of attention than it has in the past. But let us acknowledge that it is just one of many risks that are front and centre for companies. So, what’s the opportunity for insurers to help businesses adapt to climate?

The best model is to make sure that companies incorporate into their business plans and strategies the risks to their business — their physical plant, employees, clients and overall resiliency — so that they look at it from a holistic point.

Insurers must model climate change in these different ways because there is still such uncertainty about it. No one is saying it is not going to happen; we’re just not sure if sea levels will rise by one foot or six.

Industries cannot tackle climate risk within the perimeter walls of their premises; they have to think beyond them.

Unfortunately, opportunities at the intersection of insurance and climate change are moving slowly. Only a handful of proactive insurers understand climate will change the rules of the game.

The writer is a business development consultant.

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