Writing in the latest Insurance Europe Annual Report, Michael Szönyi argues that measures to adapt to the changing climate are just as important as mitigation efforts – and that the insurance sector has a significant role to play.
Much progress to limit human-induced climate change has been made, but it remains nowhere near the efforts needed. So, while society must continue to make every effort to keep warming to the 1.5°C agreed in Paris, increased importance must be placed on adaptation.
Research, including our own, confirms that climate change adaptation finance is insufficient and is not reaching those who need it most. We must therefore follow through on the commitment to leverage $100bn for climate finance, with an even split between mitigation and adaptation.
Prevention is a wise investment
It has been shown that any investment, whether into mitigation or adaptation, is economically sound and pays off, with consistent cost-benefit ratios of 1:5 up to 1:10. These include nature-based solutions — such as natural water infiltration, biodykes, and making room for the river, which provide additional benefits on top of financial ones.
However, various hurdles must be overcome and false incentives must be eliminated to massively scale up and speed up climate-smart and risk-informed development approaches.
Synergising between mitigation and adaptation
A building designed and constructed today can easily meet mitigation targets/be net-zero and be adapted to hotter temperatures, more intense storms, stronger hail and much more. The insurance industry has a long track record of identifying and assessing emerging risks and providing recommendations for how to reduce them and hence can support the transition to highly adapted, low-energy buildings. This history goes all the way back to the fire sprinkler.
In the years to come, the industry can help the adaptation to climate risks through modelling, risk-assessment capabilities, learning lessons from past and new claims, and providing those learnings to decision-makers, construction experts and society at large. As an industry, we must embrace new technologies and help reduce new risks rather than slowing new approaches because we consider them too risky.
Prevention is economically and socially right
The case for prevention is crystal clear, yet we keep falling at the hurdles of who pays and who profits, and when to act.
Not enough progress has been made to ensure fair, pre-arranged compensation through the use of insurance as opposed to unconditional, ex-post compensation (such as that implemented after the catastrophic flooding across Europe from low-pressure weather system “Bernd” in July 2021).
Improving protection only after a loss reduces the benefit, as both the initial loss plus the cost of prevention have to be paid. We must therefore better anticipate where the next major loss will occur.
Global capital markets should be part of the adaptation solution, yet their focus so far has mostly been on mitigation. More willingness to design and implement longer-term resilience bonds and to take the upfront risks are urgently needed.
Devolving authority and skills to the lowest possible level
I see a big opportunity for adaptation at the local level, where communities take decisions on their climate risk management processes. Often they have the decision-making power, but do not get the necessary support, incentives, skills and qualifications.
The Principles for Locally Led Adaptation are the right approach to bringing support down to the local communities on the frontline of climate-change impacts. They will help us reach those that are most exposed and need the best adaptation, focusing more on people (and their assets) than on high-value assets alone.
Reconsidering the role of the insurance industry
From a private sector perspective, investing in adaptation — including in the most climate-vulnerable countries — continues to look unattractive and is often considered risky. We must change this into an opportunity. Let us better understand and handle the new risks.
We must make clear that insurance mechanisms alone do not solve the adaptation challenge, since a risk transferred is not a risk reduced. We should consider how we more stringently link insurance mechanisms to adaptation action, by providing more direct and clearer rewards (such as better prices, higher capacity, better follow-on support, and more) to those that take adaptation action.
In conclusion
I am hopeful that the insurance industry can continue to provide its ample support mechanisms in a changing world and play a meaningful part in society’s journey towards a well-adapted and net-zero future in 2050 and beyond.
Michael Szönyi is the Flood resilience programme lead for Zurich Insurance. Read the full version in Insurance Europe’s latest Annual Report.
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