Changing climates: the heat is (still) on

Any future impact of climate change depends on the extent of warming that materialises. Ongoing experience indicates that global temperatures continue to rise. 2023 was the warmest year ever, by a substantial margin, with El Niño also having an impact.¹ 

In this study, we combine our insurance knowledge of property damage resulting from natural disasters with new scientific evidence from the Intergovernmental Panel on Climate Change on the probability (low, medium, high) of more severe weather conditions in different countries. Our analysis covers 36 countries and focuses on four major weather perils: floods, tropical cyclones, winter storms in Europe and severe convective storms. These are the main loss-inducing perils for the insurance industry today and account for the largest share of economic losses from natural disasters globally.

To date, the main drivers of rising economic losses have been growth, urbanisation and associated asset value creation: there are more assets that need to be insured. As of today, in terms of property impact, the four weather perils cause expected economic losses of USD 200 billion annually. However, this is just the lower bound of all potential losses, as not all perils (eg, heatwaves) are covered, and only property losses are accounted for. As changing climates fuel weather event intensity, loss potential will likely rise. Currently, climate change plays a relatively small role but we expect its associated losses will contribute more to economic losses in the future. As our 2021 report The economics of climate change: no action not an option demonstrates, if global warming remains on the current trajectory, the world could lose up to 7-10% of GDP by mid-century.²

In terms of property damage, the greatest vulnerability to potential for rising losses in the future lies in countries where hazard intensification coincides with high levels of economic exposure. This is the case for the Philippines, where annual economic losses (as a percentage of GDP) from weather events today are much higher than all other countries (around 8x more than the US, the second highest), and it is also exposed to a high probability of hazard intensification. The US presents a combination of the highest economic losses from weather events in the world, in absolute terms, and medium probability of more intense hazards.

The losses inflicted by severe weather bring financial repercussions too. Drawing on our research on insurance resilience (the share of physical assets insured against weather perils), from this perspective we find that low insurance penetration renders important global growth engines like China and India as among the least ready to face the rising losses from peril intensification.

The first step to cutting economic losses is to reduce the loss potential in the first place, through adaptation measures. Insurance can compensate for residual losses. Examples of adaptation actions include enforcing building codes, increasing flood protection and discouraging settlement in areas prone to natural perils. The economic dividends of adaptation steps can outweigh their costs by multiples ranging from 2:1 to 11:1. Even so, adaptation and insurance can only go so far. Climate change mitigation (ie, reducing emissions) is fundamental to counter the overall economic effects of global warming.  

With debt sustainability a concern for many countries, greater emphasis is on mobilising private-sector financing for mitigation and adaption projects. In 2022, we estimated a cumulative global investment gap of more than USD 270 trillion must be filled to deliver net zero emissions by 2050.³ There is scope to channel more private capital into this area. For instance, at a total USD 5.6 trillion, the sustainable debt market is still small (less than 5% of global bond markets), and of new global debt issuance, only around 5% is ESG-labelled. Currently less than 2% of adaptation finance comes from private sources. Here the insurance industry can offer support. As long-term investors, insurers can contribute to the financing of mitigation efforts and adaptation infrastructure. They can also underwrite climate-positive projects, share risk knowledge and incentivise loss mitigation behaviour.