SUSTAINABLE INSIGHT

Growing Protection Gap for Physical Climate Risks

Tue 03 Nov, 2020 - 11:40 AM ET

Insurers’ risk models are increasingly sophisticated, but their products cater towards compensation for individual events. Fitch Ratings believes that the longer-term climate risks to key real-estate markets are rarely priced in bonds or their underlying property insurance costs. Much of this risk stems from the slow, incremental damage that many chronic climate risks can create, particularly when coupled with more frequent and more severe acute risk events (as expected by climate scientists) and their implication for asset values and the real economy. Urbanisation in particular has led to high concentrations of human and physical asset exposure. The protection gap between insured and uninsured climate-related losses on real-estate assets continues to grow, with losses from uninsured assets negatively affecting the pace and level of recovery from increasingly severe and frequent natural disasters. Blended finance and insurance-linked securities instruments will be used increasingly to address the protection gap, although these instruments are much smaller than the protection gap. Large insurance providers increasingly use reinsurance and insurance-linked products, such as catastrophe bonds, to mitigate risks from climate disasters. The accuracy with which exposure to long-term climate risks can be measured and modelled using existing tools and methodologies is unknown.

Download Now

Thank you. Your download link will be emailed to you shortly.