Seminars within the National Plan for Adaptation to Climate Change: impacts and adaptation in relation to climate change within the insurance industry

Known facts and uncertainty in relation to flooding. The data on the economic loss has exhibited an upward trend since the 1970s, although this may be explained by an increase in exposure and vulnerability. There is currently no evidence in observed readings of an increase in floods in Spain, although extreme rains have been on the rise in certain regions and changes have actually been observed in seasonal factors. All forecasts point to an upturn in the frequency of episodes and a major escalation in river floods. Assessment of the impact of climate change on water resources and droughts in Spain suggests a generally falling trend for such resources as the 21st century progresses. Most weather forecasts also indicate more frequent droughts going forward and this effect becoming more pronounced as we advance further into the 21st century.
 
Future trends and forecasts concerning storms and extreme winds feature among the fields with the least information to work off, given that there are no general forecasts and neither is there a historical global record, such as might be the case with temperature or rainfall. There is a lack of studies that offer any detailed analysis of trends in cyclonic disruption that venture beyond occasional data output on wind force. In other words the models provide results for wind extremes for grid reference points which offer data, but these have to be included in the context of an analysis of how certain situations are expected to develop (anti-cyclones, depressions, etc.) that explains such results and endows them with qualitative information. At the moment the University of Cantabria is conducting a project in conjunction with the CCS and backed by the Fundación Biodiversidad to provide “Regional climate change forecasts for extreme winds in Spain for the 21st century”. Work on this is expected to conclude in summer 2018.
 
The coastal systems are particularly vulnerable to rises in the average sea level and changes in the strength and frequency of floods. In the case of coastal flooding, this will depend on different factors, such as sea-swells, wind, atmospheric pressure and the average sea level. The latter aspect is particularly dependent upon global warming. The two most worrying effects of climate change are permanent flooding in the low-lying areas and erosion on beaches. In this regard the Environmental Hydraulics Institute "IHCantabria" is analysing the effect of climate change on coastal flooding by calculating flood probability charts based on simulations for each specific case and drawing up maps of coastal flood hazard levels.

Within the sphere of activities of the CCS the question arises of the need to evaluate the changes that occur as a result of climate change in terms of the risks it assumes and to find solutions that enable it to continue to take them on. To this end the CCS is, on the one hand, cooperating with several technico-scientific institutions, most of which were present at the  seminar, to gain a better understanding of how hazardousness is evolving (in particular as regards flooding and strong winds) as a result of climate change and, on the other hand, from the standpoint of insurance technical bases, it is studying the sustainability of the current extraordinary risk insurance which the CCS handles and weighing up the long term options and, if the situation calls for it, those for adjusting surcharges or coverage. Moreover, one aim of extraordinary risk insurance is to reduce loss and build up the resilience of society. Continuing along the path of improving early warning systems and handling emergencies better, both on the part of administrative bodies (civil protection, land planning, etc.) and in terms of the behavioural patterns of the insured themselves (risk awareness, self-protection measures), means generally reducing risk and offsetting the potential increase in hazardousness with a fall in exposure or vulnerability.
 
Together with the rest of the insurance industry, the CCS is also attentive to developments regarding other risks, such as heatwaves or pandemics, which are not at present included within extraordinary risk insurance.
 
For its part agricultural insurance is an ideal instrument to mitigate the adverse effects of climate change on a sector which is the most exposed to and dependent on the behaviour of natural phenomena, mainly as far as droughts, frosts/heatwaves and phenomena such as hail, and snow etc. are concerned. The sum assured has steadily risen over time, as well as the penetration of such insurance, although taking it out is very variable from sector to sector, with fruit trees presenting the highest percentage. For example, over the 2012-2016 five-year period the percentage of pay-outs for risks was divided proportionally thus: hail 41%, drought 19% and frosts 17%. All the risks that could be affected by climate change are currently covered under the agricultural insurance system, although it will continue to adapt to any needs that might arise. The high loss ratio entails high premiums and therefore the need for government subsidies. Given that climate change could make loss ratios even worse, it is almost certain that there will still be such a need for government subsidisation of premiums.

With respect to financial risks associated with climate change, these vary in nature: there are physical risks (compensation for loss that relates directly to the increase in hazardousness deriving from climate change); transition risks (from the impact of regulation on the business model); from changes in market trends (fossil energy/fuels), and liability risks (from possible prosecution for liability in causing such loss), etc. A better understanding of financial risk among markets, banks and financial regulation is key. There is a need to anticipate what sectors will be the most affected and which companies will emerge stronger and which stand to lose out. The European Central Bank has issued some suggestions for including carbon risk in credit risk models and the intention is to develop a strategy for managing carbon risk and reflecting the externalities of climate change. One option for the financial sector could be to draw inspiration from the insurance system or try to come up with official mapping of risks.

Nacional de Reaseguros confirmed the situation regarding the risks and opportunities faced by the reinsurance industry in relation to climate change. Disaster risks insured are continually on the rise and economic loss is far above losses insured. By way of example, the figures on disaster damage in 2017 were the highest on record.

Transferring risk via insurance is in itself an adaptive measure. Thus existing instruments can be of assistance in adapting to climate change. The following suggestions were mentioned among the various different instruments:
 

• Countries such as Spain have natural disaster insurance mechanisms, in terms of both assets and people, and agricultural property, that have a high level of penetration and which are also adaptable. They therefore stress this role of insurance as a mechanism of adaptation. This flexibility can, if necessary, be manifested through making adjustments using the various different mechanisms available: forms of coverage, insurable limits, deductibles, rating, etc. It is important to persevere in promoting insurance and making it increasingly accessible so that it can perform its function effectively.
• Although they are currently not very widely used, thought could be given to developing green insurance policies which reward sustainable measures in promoting mitigation and adaptation.
• The role of insurance brokers in their capacity as advisers on specific products tailored to individual needs could be enhanced.
• In the specific case of agricultural insurance, this function of brokers as advisers on specific risks associated with each kind of crop is key. Similarly an option as regards a means of adaptation is changing the location of crops, particularly annual ones, to other zones with better climactic conditions (kinder temperatures, lower frequencies of adverse phenomena, and better water availability, on both unirrigated and irrigated land, etc.).
• Likewise as regards agricultural insurance, uprooting the damage-affected crop in the early stages could allow farmers to replant so that the annual yield is not lost completely. This is a practice that is already being applied. Moreover, prompt payment of compensation which is done where possible provides the insured with greater financial solvency and allows them to plan their activities better.