It’s apparent that extreme weather, as a result of climate change, is here to stay, and it’s no longer just an issue for the property and casualty insurance market. In fact, the entire financial sector needs to pay attention, notes Insurance Bureau of Canada (IBC).
“A generation ago, insurers paid out – on average – about $400 million a year in today’s dollars on weather-related costs in Canada,” says Don Forgeron, president and CEO of IBC. “Today, that number is often over $1 billion, and sometimes much higher. It’s time we confront reality and begin to understand that due diligence and risk management in the 21st century must also include climate risk.
“Fortunately the Task Force on Climate Related Financial Disclosures (TCFD) has created a blueprint on how to proceed,” adds Forgeron. Forgeron points to the recommendations of the TCFD (also known as the Carney-Bloomberg report) that outline the information that companies should disclose to help investors, lenders and insurance underwriters understand how they are managing climate-related risks and opportunities.
Governments should also disclose information about their efforts to mitigate climate risk, Forgeron says. Investments in municipal infrastructure, improvements in building codes and more stringent land-use planning all reduce risk and have an impact on investment and underwriting decisions.
“Because climate-risk disclosure is so complex, many companies, and even investors can’t envision all the scenarios at play,” says Forgeron. “And even if one could, we quickly get into issues of measurement and comparability. We need to ensure we are comparing apples to apples. It is a challenge for sure, and that is why we need to get started.”
Blair Feltmate, head of the Intact Centre on Climate Adaptation at the University of Waterloo, agrees. For investors, climate risk can play a factor in equity selection because nearly every industry and company is susceptible. For instance, a decade ago in California, hydroelectric sources constituted 18% of the state’s electricity supply, explains Feltmate.
“During the drought of 2011 to 2016, reservoirs dried up in southern California,” says Feltmate. “So electricity production dropped from 18% to 10% – almost half. For investors who put money into a hydroelectric company, a large percentage of that which they invested became a stranded asset, producing zero return.”
As a result, Feltmate says investment advisors and portfolio managers need to start asking companies tough questions before including them in a client’s portfolio. Ask: “What analysis have you done to identify your potential risk relative to climate change and extreme weather events, whether that’s a flood, fire or hail impact? What are you doing in response to mitigate risk and maintain continuity of business operations?”
And if that company is dependent on another for supplies, Feltmate suggests asking, “How vulnerable is your operation to just-in-time delivery? Do you have a backup plan?” He adds a company must be wary of any asset it has that could be susceptible to climate risk, which could, in turn, affect returns.
Impact on life and health industry
Flooding has become one of the most common insurance claims for homeowners, notes Feltmate. Their cost to repair damage can be upwards of $40,000 if they’re not insured.
But there’s another cost that often gets overlooked. “Life and health insurers have thought, ‘Oh, basement floods aren’t our problem.’ But if someone has a flooded basement, the average time that person misses from work is seven days, whether that person has insurance or not. And that’s a claimable issue, so there’s an elevation in claims for lost time from work going to life and health insurers.”
With the evidence showing that severe weather is happening more frequently and affecting all industries, it’s more important than ever that there’s a national conversation, adds Forgeron.
“We can’t always expect Governments to lead. It’s time the rest of us stepped up. At IBC, we firmly believe that everyone has a role to play, and only by working together – each of us contributing – are we going to be able to confront this challenge,” he says. “We call this a ‘whole-of-society’ approach to climate change.”