Unfortunately, climate change has a lot of influence on insurance. As the climate keeps adjusting with time, insurers don’t have a choice but to face high financial risks from the payouts and claims closely associated with extreme weather conditions that include flood, drought, and fire. Climate change is highly unpredictable, with various happenings ranging from rising sea levels to unbearably hot temperatures, frequent storms, etc., all contributing to insurers’ inability to prepare for long-term financial risks.
Climate change and Insurance are closely related, as various forms of natural disasters can affect insurance and insurance payouts in different ways. As we proceed in this article, you will perfectly understand the relationship between climate change and insurance. When properties are damaged, that means a higher payout for insurance companies. Hence, these companies need to be ahead of the curve regarding the potential risks of climate change and how this can affect insurance.
How Climate Change Affects Insurance
Climate change has enormous effects on weather patterns around the globe; in that light, insurance isn’t left out. Are you perplexed to know that climate change and insurance are interlaced? A drastic change in one greatly affects the other.
Areas more prone to these disasters will be subjected to higher premiums, as insurers always try to cover the cost of higher chances of potential losses due to extreme weather conditions. These changing climate conditions will indeed mount much more pressure on insurance companies, making it necessary for policies to be put in place to manage future financial risks associated with climate change.
This article will categorically discuss the different risks involved with climate change and insurance and how they can be addressed perfectly. According to the 2015 Bank of England Prudential Regulation Authority Report, the three primary risk factors can be grouped into physical, transitional, and liability risks.
1. Physical Risk
As the name implies, this risk is affiliated with weather-related events, including floods, earthquakes, volcanic eruptions, cyclones, storms, etc. The impacts of such events as property damage can directly affect insurance. However, volcanic eruptions, cyclones, or hurricanes have not been recorded in Nigeria. However, rain storms and floods have completely taken over the show in some parts of Nigeria, causing an intense loss of farm products, displacement of persons as a result of damage done to properties, health issues, and even death in very severe cases.
Using catastrophe modeling for underwriting and pricing in more developed economies has helped insurers carefully manage the impact of physical risks. However, most insurers in Nigeria do not incorporate catastrophe modeling when pricing insurance products. However, some farsighted insurers tend to manage this risk by reinsurance arrangements.
Nigerian insurance sector should not turn a blind eye towards the havoc these physical risks have posed to Nigerian Insurance companies, and some deliberate steps should be taken towards alleviating the impact of this risk. Some of these include:
- The Nigerian government should not relent in its efforts to persuade its citizens to embrace agricultural production. Activities in the Agricultural sector will help uncover the hidden interests of insurance firms, as they will devise ways to handle the upcoming physical risks associated with this sector.
- Insurance firms should review their assumptions regarding setting the price of their products; concerning the futuristic expectation of the occurrences in climate change, the records in history might not be enough to give accurate price estimates anymore.
2. Transition Risk
This can be referred to as financial risks likely to occur in financial firms due to adopting a low-carbon economy. What is a low-carbon economy? According to Wikipedia, a low-carbon economy is an economy that is known to absorb the exact amount of greenhouse gases as it expels. Over time, research has shown that greenhouse gas emissions as a result of human activity have been one of the leading causes of climate change since the mid-20th century.
Nigeria looks forward to adopting a low-carbon economy, which is in line with the goal of global climate change. It has established a strategy that is documented in the Nigeria Climate Change Policy response. This strategy aims to encourage low-carbon, high-growth economic development and promote a climate-resilient society. This is a way to address Nigeria’s climate change risk and insurance.
The Way Forward
However, managing carbon-intensive risks may be challenging due to the uncertainty related to future happenings in current policies of low-carbon economy, climate change, and insurance. Insurance companies will have a piece of the cake if they accept the role of playing a major role by making reasonable efforts to reduce the uncertainty about the low-carbon economy and by embracing regular engagements with government policies on the topic of low-carbon economy and climate change.
The Regulatory body for Insurance in Nigeria; the National Insurance Commission (NAICOM) can also help build awareness of the impact of not neglecting a low-carbon economy and climate change policies on insurance in Nigeria.
3. Liability Risks
When it concerns climate change and insurance, there is every possibility that climate change will make liability risk an outstanding pitfall for the Nigerian Insurance sector. Liability risk is not new in the world of insurance. One of the main reasons insurers underwrite liability risks is to provide optimum coverage for the insured, who is liable to pay compensation legally due to some form of action. The interesting part is that the extent of the legal liability depends on the legislation.
Nigerian Insurance companies should use predictive analytics tools to help address the financial risks associated with climate change. These tools can access risk exposure, thereby enabling businesses to make well-informed decisions about strategizing in the future.
Conclusion
Climate volatility is constantly evolving and beyond prediction. Proper knowledge of the relationship between climate change and insurance will enable insurance companies to always be ahead of the curve and completely prepared for any future occurrences.