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The number of severe weather-related natural catastrophes has risen markedly since 1970, and is expected to be exacerbated by the effects of climate change. Insurance losses, as well as uninsured losses, have also increased significantly over recent years, reflecting increased property values, population density, and development in exposed areas such as coastlines. This trend is also expected to continue: In the US, the coastal population is expected to grow 9% by 2020, to 134 million people from 123 million currently.

While some communities have started to implement risk-mitigation measures, more needs to be done. Extreme weather events increase the need for community-based preparation. A well-considered plan would entail modeling an event, determining potential damage, and identifying and assessing risk mitigation measures. Damages for which protective measures are too costly, or otherwise undesirable, could be covered by insurance.

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The number of severe weather-related natural catastrophes has risen markedly since 1970, and is expected to be exacerbated by the effects of climate change. Insurance losses, as well as uninsured losses, have also increased significantly over recent years, reflecting increased property values, population density, and development in exposed areas such as coastlines. This trend is also expected to continue: In the US, the coastal population is expected to grow 9% by 2020, to 134 million people from 123 million currently.

Global Number of Weather-Related Catastrophes, 1970-2014

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Source: Swiss Re Economic Resesarch & Consulting

While some communities have started to implement risk-mitigation measures, more needs to be done. Extreme weather events increase the need for community-based preparation. A well-considered plan would entail modeling an event, determining potential damage, and identifying and assessing risk mitigation measures. Damages for which protective measures are too costly, or otherwise undesirable, could be covered by insurance.

The Economics of Climate Adaptation

Swiss Re is using its loss-modeling expertise to estimate the future financial impacts of numerous climate change scenarios. Our methodology, called the Economics of Climate Adaptation (ECA), enables cities, regions, and countries to evaluate the cost effectiveness of measures that could be undertaken to offset potential future losses.  (Modeling of future climate conditions is largely based on a range of estimates provided by the Intergovernmental Panel on Climate Change.)

Insured Catastrophe Losses, 1970-2014 (2014 USD Billions)

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Source: Swiss Re Economic Research & Consulting

Natural Catastrophes and Man-made Disasters, Insured and Uninsured Losses, 1997-2014, (2014 USD Billions)

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Source: Swiss Re Economic Research & Consulting

Following Hurricane Sandy in the US, the format was used to model the historic storm surge and wind damage on New York City. It had previously been used to assess similar risks in southern Florida. For the New York City study, average annual losses due to weather-related events were evaluated under future scenarios that incorporated climate change (sea level rise and more frequent and severe storms).

The ECA methodology is also used to calculate the potential reduction in loss from various preventive measures that cities and regions can undertake, and creates a cost/benefit curve (cost of implementation and operation versus amount of loss averted). The curve for southern Florida is provided below as an example. Options below the dotted line are considered cost-effective, or “no regrets” measures, because the cost of implementation is less than the modeled benefit (averted losses) in the study area.  Measures above the line are not necessarily to be ignored, however. They may be cost-effective or otherwise attractive when considering ancillary benefits. For Broward, Miami-Dade and Palm Beach counties, despite a potential annual average cost of hurricanes equating to 10% of local GDP by 2030, over 40% of the total expected loss could be averted using cost-effective measures such as beach nourishment, vegetation management, and elevation of new homes, among others.

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Source: Swiss Re

Examples of ancillary benefits could include a seawall that incorporates walking or biking paths; bioswales (sloped drainage courses designed to trap and filter storm-water and runoff) that provide wildlife habitat; or wetlands restoration along with recreation or tourism value.

Bioswales installed in the Bushwick, East New York, and Edenwald sections of New York City as part of a pilot project to capture storm water and reduce flows of untreated sewage into the city’s waterways performed above expectations, according to a March 2015 report by the Department of Environmental Protection.  The standard for effective bioswales is the capture of the first inch of rainfall over 10% of the city’s impermeable surfaces. The pilot-project swales, in addition to providing shade and a more attractive streetscape, captured an inch of rain over 14% of the surfaces.  Each swale is designed to hold 2,244 gallons of rainwater.

Other potential protective measures could include improved building codes or the inclusion of sea level rise projections in FEMA maps.  Updated flood maps would help determine where we build, i.e., will the area be in a flood zone in the foreseeable future? Also, risk factors such as the degree of soil subsidence (sinking) should also be considered when siting properties.

Developing Countries at Greater Risk

For various reasons, developing countries are more at risk for damage from severe weather events.  Many lack funding for adaptation investment; they may have weaker building regulation or oversight; and often they have large populations located in exposed areas subject to storm surge and flooding, such as river deltas. It’s also usually the case that developing economies have lower insurance penetration rates, which may reduce funds available for repair and reconstruction.  Even though the world’s economies have grown, weather-related catastrophes are costing an increasing percentage of global GDP, as shown in the below graph.  Uninsured losses as a percentage of GDP are also rising. Creative and thoughtful solutions are increasingly critical.

Global Losses and Insured Losses from Weather-Related Catastrophes as a Percentage of GDP, 1974-2014

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Source: Swiss Re Economic Research & Consulting

Financial Tools for Risk Mitigation

As awareness of the need for crisis prevention and mitigation measures grow, we could see a greater use of capital markets structures such as catastrophe bonds, which spread funding of recovery among various investor groups, and insurance-related products such as parametric cover, which provides initial funding for emergency response costs (police and fire department, equipment for road clearing, etc.) based upon weather-related triggers (wind speed, for example).

Following the devastating earthquake in Haiti, parametric insurance immediately paid out $8 million. In Tonga, participation in the Pacific Catastrophe Risk Insurance pilot organized by the World Bank enabled the island nation to swiftly receive emergency relief funds following Cyclone Ian in early 2014. The Caribbean Climate Risk Insurance Fund was expanded in June 2014, having proven its effectiveness.  Cover has also been provided for private companies, particularly in the energy sector, and for state governments.

In Sum

Severe weather events such as Hurricane Katrina and Hurricane Sandy illustrate how vulnerable even the most developed societies are to serious storms. Regional planning decisions must increasingly recognize the importance of redundancy (duplication of essential services such as phone communication), and climate change considerations. Insurance companies can assist by providing risk evaluation, quantification, and analysis, as well as risk transfer.

Additional information can be found on Swiss Re’s website.

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Laural Warren joined Swiss Re’s Financial Risk Management team in 2007 from ABN AMRO.  At Swiss Re, she was responsible for assessing credit risk to banks and financial institutions. In 2014 she transferred to Qualitative Risk Management, evaluating potential reputational risk posed by new transactions, sensitive business risk outreach in the Americas, support and research for Swiss Re’s Sustainability initiatives in the US, and analysis of US emerging risks.