The effect of climate change on the Insurance industry

Climate change is altering weather patterns and causing an increase in the intensity and frequency of adverse weather conditions. Weather conditions such as flooding, hail and drought can affect a policy holder's insurable assets. Climate change therefore creates risks to both movable and immovable property and one of the issues for insurers is how to underwrite the additional risks that climate change brings. In November 2013, a hailstorm occurred in Gauteng with Santam reportedly receiving more than 2,000 claims with an estimated value of R60 million. Climate change can clearly lead to an increase in claims being submitted and needs to be addressed by the insurance industry.

Apart from the effects of climate change on policy holders, it can also impact on the sustainability of the insurance industry. The availability of insurance is premised upon two factors, being the "ability of the insurance industry to finance risk and the expectation that the insurance underwritten will be profitable".

Climate change can therefore pose a financial threat to the insurance industry, and management and understanding of climate change and its effect on insurable assets are crucial in ensuring the future sustainability of the insurance industry.

Neither the Long-term Insurance Act, No. 52 1998 nor the Short-term Insurance Act, No. 53 of 1998 makes provision for addressing risks arising from the effects of climate change. Despite the lack of guidance there are various measures that insurers can adopt in order to mitigate or avoid the risks posed by climate change:

• Risk assessment will need to include climate change as a component in its management of future risk. When assessing risk, weather patterns and their potential effect on an insurable asset must be a component in an underwriter's estimation of future risks.
• Pricing will need to reflect the underlying weather-related risks. In this way, insurance companies can influence their customers to reduce their exposure to climatic risks through the differentiation in the pricing of insurance premiums. By way of example, a policyholder can receive a reduction in their premium if they take steps to protect their insured property against climatic risks such as flooding and hail. By the same token, a policy holder may face a higher premium if they choose to develop a project in an area prone to climatic risks such as floods and droughts.
• Insurers can draft their policies to limit their loss in the face of weather-related risks. This can be done by limiting the scope for claims which can be made or providing that measures aimed at protecting property against weather-related risks are a necessary requirement for a claim.

The insurance industry bases their premiums on statistics of past loss and probabilities. Climate change can create uncertainty in the pricing process but insurers can develop models to assess their possible loss for any climate change related risk. It will be necessary also to collect data on climate change related risks as well to develop the resources needed to anticipate and analyse climate risks and their impact.

Climate change should not be ignored or underestimated and will inevitably lead to change both for the insurer and the insured.