U.S. Second Most Exposed to Climate Losses

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A new report from the Swiss Re Institute based on the latest science from the Intergovernmental Panel on Climate Change (IPCC), analyses trends in hazard intensification overlayed with the insurers own economic loss estimates with respect to four major weather perils - floods, tropical cyclones, severe thunderstorms and winter storms in Europe - that now account for $200 billion in annual global economic losses.

The report entitled "Changing climates: the heat is (still) on" finds that as weather-related natural catastrophes intensify due to climate change, the U.S. is the second most exposed with a medium probability of hazard intensification and the highest economic losses in absolute terms from weather events worldwide (totalling USD 97 billion, or 0.38% of GDP as of today). This compares with the Philippines, which has the high likelihood of hazard intensification and annual economic losses of 3% of GDP as of today.

While flood risk is projected to intensify globally, the main driver of major weather-related economic losses in the US, as well as in east and southeast Asia, are tropical cyclones (hurricanes). Severe thunderstorms also account for a large share of the economic losses.

In general, Swiss Re finds that countries with sizable insurance protection gaps and where the establishment of loss mitigation and adaptation measures lags the rate of economic growth, are most financially at risk from hazard intensification. The authors note that these are the lower bound of potential economic losses, as the study does not cover all weather perils (e.g. heatwaves) and accounts for property losses only.

Swiss Re acknowledges that to-date, climate change has played a relatively small role compared with the underlying main drivers of rising economic losses - growth, urbanisation and associated asset value creation. That said, the report underscores an increasingly clear and significant trajectory, under which Swiss Re has previously estimated that the world could lose up to 7-10% of GDP by mid-century.

In response, Swiss Re says that while the world must do more to reduce greenhouse gas emissions, loss reduction, prevention, adaptation measures - from building codes to flood protection and policies that discourage continued high risk development - are essential and will yield economic dividends (outweigh their costs) by multiples ranging from 2:1 to 11:1.

With debt sustainability a concern, Swiss Re calls for a greater emphasis on mobilising private-sector financing (including from insurers) for mitigation and adaptation projects. Swiss Re has previously estimated a cumulative global investment gap of more than USD 270 trillion must be filled to deliver net zero emissions by 2050 - in comparison with a sustainable debt market totalling USD 5.6 trillion (less than 5% of global bond markets), and less than 5% of new global debt issuance being ESG-labelled (of which climate mitigation and adaptation is a significant but not the sole contributor).

"Climate change is leading to more severe weather events, resulting in increasing impact on economies" said Jérôme Jean Haegeli, Swiss Re's Group Chief Economist. "Therefore, it becomes even more crucial to take adaptation measures. Risk reduction through adaptation fosters insurability. The insurance industry is ready to play an important role by catalysing investments in adaptation, directly as a long-term investor and indirectly through underwriting climate-supportive projects and sharing risk knowledge. The more accurately climate change risks are priced, the greater the chances that necessary investments will actually be made."

Source: Swiss Re Institute, https://www.swissre.com/institute/research/topics-and-risk-dialogues/climate-and-natural-catastrophe-risk/changing-climates-heat-is-still-on.html