Climate change crisis may risk world becoming uninsurable, warns Allianz

Insurance giant Allianz has warned that some risks associated with climate change are now exceeding the capacity of insurers to take them on their books.

Frequent natural disasters around the world have called into question the insurability of extreme weather events.

The German-based group, which has recently partnered with Sanlam in Africa, said in a research note that 2023 is likely to be the fourth year in a row in which insured costs from natural disasters worldwide exceed the $100bn mark.

“The risk landscape has also undergone a significant transformation: traditional primary perils like earthquakes and tropical cyclones are no longer the predominant threats. Instead, secondary perils, including hail, floods, storms and wildfires — all of which have a discernible link to the changing climate — have taken centre stage in the spectrum of hazards,” Allianz said.

“The decision of some US insurers to withdraw from covering some vulnerable areas is a brutal wake-up call. According to a study by the Geneva Association, well over 50% of respondents believe that it will be more difficult to obtain insurance coverage against natural hazards in the future; almost 20% of respondents in France, Germany and the US even fear that insurance cover could become impossible or far too expensive.”

Parts of KwaZulu-Natal are now battling heavy rains that have damaged property and claimed several lives. According to data from local insurance companies, losses from the April 2022 KwaZulu-Natal flood were estimated at R54bn.

SA’s largest short-term insurer, Santam, has flagged climate change as one of the key headwinds facing the business, and is prioritising the deployment of geocoding to minimise losses stemming from adverse weather conditions that have become frequent.

Geocoding provides a set of co-ordinates for each address, with the goal of allowing an insurer to understand the location of each building that is being insured and its proximity to various peril zones.

The technology also enables experts to map and analyse climate data to identify areas that are particularly susceptible to climate change effects.

Santam CEO Tavaziva Madzinga in December said the growing number of large catastrophe reinsurance claims locally, coupled with rising global losses, has caused reinsurance premiums to increase significantly. He warned that this volatility in the reinsurance market is likely to become the “new normal”.

The Prudential Authority in 2023 published draft guidance notes for banks and insurers on climate-related risks and disclosures. The watchdog has proposed that banks and insurers ensure that climate-related risks are identified and accounted for in compliance risk-management frameworks. 

Allianz says in its report climate events are no longer purely random or unpredictable, but that heatwaves and floods are occurring with increased regularity.

“At the same time, the extent of damage caused by an event is becoming increasingly difficult to predict; the maximum level of damage can reach unmanageable dimensions ... an uninsurable world would be not only a world that failed to cope with climate change but also a metaphor for a collective ethical where each individual dodges their moral obligation to reduce carbon emissions,” it said.

“Certainly, the trade-offs between affordability and insurability — or, more generally, between our current and sustainable lifestyles — are becoming more challenging because we have long passed the point when a gradual and smooth economic transformation would have been possible. Rapid action and thorough behavioural change are needed to achieve the Paris goals and keep the rise in temperature at 1.5°C.”

khumalok@businesslive.co.za