Evidence is growing that existing insurer risk frameworks are not fully pricing the “chronic, long-term and cumulative nature” of the physical impacts brought about by climate change, ratings agency Fitch says.
These longer-term climatic risks are rarely priced in to bonds or their underlying property insurance, the Growing Protection Gap for Physical Climate Risks report says.
Extreme weather and natural disaster insurance is instead geared towards protection against individual events, Fitch Associate Director David McNeil, says.
“By contrast, the physical impacts of climate change tend to be chronic, long-term and cumulative in nature,” Mr McNeil says. “There is growing evidence that these effects may not be fully priced into existing risk frameworks.”
The ratings agency says the gap between insured and uninsured or underinsured climate-related losses on real estate assets continues to grow, with implications for the pace of recovery from increasingly severe and frequent natural disasters.
Across countries and within key real estate markets such as the US, exposure to risks can vary substantially due to varying levels of cover.
Analysis by Fitch of country-level trends in flood insurance show a “patchwork” of coverage, with levels differing widely even between developed markets.
Australia’s flood policy coverage is 50-60%–and lower in some high-risk areas—compared with 75% in the US, 95% in the UK, and close to 100% in France, Spain, Iceland and Switzerland.
Flood risk is a “key example of pervasive, long-term environmental risk that can be difficult to measure and price with a high degree of precision,” the ratings agency says.
Flood is the most prevalent natural hazard globally, occurring frequently across all continents. Yet most worldwide flood damage remains uninsured, partly because affordable and appropriate flood insurance is not widely available.
Highly detailed, often costly, data is required to price this risk accurately and low affordability represents a major barrier to wider coverage, particularly for small businesses.
Flood in the US is estimated to result in $2.1 billion ($2.93 billion) of economic losses annually, and the US Federal Emergency Management Agency has set a “moonshot target” of doubling flood insurance coverage by 2022.
“Diversification of risk, whether in the form of geographical distribution of assets or in insurance-linked instruments or country risk pools, looks set to grow in importance as physical climate risks take hold,” Fitch says.
Click here to read the full report.
