Managing insurance business sustainable in the changing climate

The Intergovernmental Panel on Climate Change’s report of the Working Group II has already established that climate change is projected to increase the likelihood and intensity of extreme weather events in India, threatening its people, agriculture and infrastructure.

Infrastructure damage due to catastrophic incidents such as climate induced floods or loss of lives due to heat stress are amongst the prominent impacts that will be witnessed in India and therefore, growing physical risks will influence the future availability and affordability of insurance protection, potentially threatening existing business models for the insurance industry.

The report said, these risks raise fundamental questions about how Indian insurers manage their business in a sustainable and profitable way.

Major floods and landslides killed over 700 people and caused USD 11 billion worth of damage in India over the course of 2018 and 2019, the WGII report said and pointed out how Mumbai, the second most exposed megacity to coastal flooding, could, without, climate mitigation, suffer cumulative economic damages of USD 49-50 billion by 2050.

The flooding of rivers in India can lead to an average annual loss of USD 6 billion. This also includes disasters such as the 2013 Uttarakhand tragedy.

The report also listed how droughts and water stresses are expected to increase across Asia and can make the agriculture sector vulnerable to drought. One of India’s largest reinsurer agreed that storms, flooding and drought are the key weather risks for the Indian region and these weather events are indeed driving greater volatility in company losses.

Said Ulka Kelkar, Director, Climate Change Programme at the World Resources Institute, India: “The insurance industry has an absolutely crucial role to play in climate resilient developments. First, by becoming nimbler in making payouts, it can help people bounce back faster from the shocks of extreme weather events and untimely weather events. Second, insurance premiums can be a very useful signal to prevent the build up of infrastructure in locations that are exposed to climate hazards.”

Kelkar also suggested that the insurance industry itself needs to look at its own investments and choose low carbon rather than high carbon projects that could become underperforming assets.

Stating that in 2020-21, the maximum number of insurance claims were due to damages caused by Cyclone Amphan in eastern India, Director, Climate Trends, Aarti Khosla said, “Yet, India has the lowest rate of insurance penetration across Asia. Insurance sector is evidently ill-prepared for short-term and immediate climate related risks, while we are not even discussing how to deal with multi-decadal changes such as sea level rise or heat mapping, which is staring us within 3-8 decades.”

Council on Energy, Environment and Water (CEEW)’s programme lead, Abinash Mohanty said, CEEW research has found that more than 80 per cent of the Indians live in districts vulnerable to climate risks. “Innovative risk financing instruments have the ability to alter the degree of impact of climate extremities, but we need to better identify and understand the evolving risk landscape,” he said.

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