Page 36 - The Insurance Times December 2024

Climate Change

Focus on Climate Risk: How Climate Risks Are

Shaping Insurance Models in India and Globally

T he growing threat of climate change is reshap- Challenges Posed by Climate Risks to

ing industries around the world, with the insur-
Insurers
ance sector facing an especially pressing chal-
lenge. The frequency and severity of extreme
weather events-such as floods, cyclones, wildfires, and 1. Increased Claims and Payouts: Extreme weather
events result in high-value insurance claims, leading to
heatwaves-have increased significantly, forcing insurers to substantial financial payouts for insurers. For example,
rethink their models, adapt their products, and redefine risk floods that damage residential properties, infrastruc-
assessments. In India and globally, insurers are pivoting to ture, and businesses generate immediate claims, which
new strategies to better manage climate risks, protect poli- can be challenging for insurers to manage. This strain
cyholders, and ensure the long-term sustainability of their on resources puts pressure on insurers to either raise
business. This article explores how climate risks are influenc- premiums or limit coverage, both of which can impact
ing insurance models, the unique challenges posed to insur- policyholders.
ers, and the strategies emerging in response.
2. Difficulty in Risk Assessment: Traditional risk assess-
The Rising Impact of Climate Risks ment models rely on historical data to predict future
claims. However, with climate change, past weather
The impact of climate change on the environment has been
data no longer accurately reflects current or future
widely documented, but the economic consequences are risks. This unpredictability makes it difficult for insurers
equally significant. According to a report by the United
to accurately price premiums or to determine appro-
Nations, climate-related disasters have increased by 83% in
priate coverage levels.
the past 20 years, costing the global economy trillions of
dollars. The insurance industry, which functions as a safety 3. Market Volatility and Capital Constraints: The in-
net for individuals and businesses, is particularly vulnerable creased frequency and severity of climate-related claims
to this growing risk. can lead to market volatility, affecting insurers' capital
reserves. Insurance companies must maintain a certain
In India, climate risks are intensifying. The country faces a level of capital to cover claims, but with escalating risks,
diverse array of climate challenges, from extreme monsoons these reserves can be quickly depleted, limiting the
and river flooding in the north to coastal cyclones in the east
insurer's ability to meet future claims and impacting
and south. Recent events, like the devastating floods in profitability.
Kerala and cyclones along the Bay of Bengal, have caused
significant economic losses and underscored the vulnerabil- 4. Regulatory and Legal Pressures: Governments world-
ity of many Indian communities and businesses. wide are introducing regulations to address climate
risks, and insurers are increasingly expected to align
These climate-related events have led to unprecedented with sustainability goals. In India, regulators such as the
insurance claims. Insurers are now grappling with how to Insurance Regulatory and Development Authority of
provide coverage for risks that are both unpredictable and India (IRDAI) are exploring frameworks to encourage
potentially catastrophic. The industry must innovate to stay insurers to factor in environmental risks. This can add
relevant and continue providing meaningful protection to to operational costs and force insurers to innovate rap-
policyholders. idly to stay compliant.

The Insurance Times December 2024 33