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Certain perils becoming pricier, harder to cover as climate risks grow

Insurance coverage for some risks is becoming rarer and more costly as climate change alters the risk landscape, according to Zurich Insurance Group AG's chief risk officer.

Speaking to S&P Global Market Intelligence following the release of the World Economic Forum's 2020 Global Risks Report, Peter Giger said certain perils are becoming increasingly expensive, and that while those price increases are justifiable, they are hitting communities affected by climate change.

"We have areas where it will be harder and harder to get coverage at all because the risk is so expensive to cover that people start to refrain from it or don't get the necessarily technical premiums approved," he said. "I see a number of issues coming our way there."

Climate change concerns took the five top spots in the World Economic Forum's 2020 list of the most likely global risks over the next 10 years for the first time in the ranking's 15-year history.

Climate-related concerns also occupied positions three to five in the ranking of the most severe risks. The issue of extreme weather events and the failure to mitigate or adapt to climate change stood at the top of the list of the most strongly connected global risks.

The report was released as bushfires continue to rage in Australia, and after California was hit by severe wildfires for the third year in a row in 2019, both of which have raised awareness and concerns about the implications of a warming planet. The challenges of a shifting climate are keeping the insurance industry on its toes.

John Drzik, chairman of Marsh & McLennan Cos. Inc. research arm Marsh & McLennan Insights, said climate change was changing property insurers' calculations about where to offer cover and what to charge.

"You've had some areas with wildfires where there has been withdrawal of capacity entirely, and you have had other places where there has been repricing in relation to the expectations around the risk," he said in an interview.

Drzik added that the property insurance industry was grappling with how to quantify how climate change is impacting, for instance, the location of flood zones and where extreme weather events will strike.

"It is a moving target and trying to get a handle on that from an underwriting perspective is, of course, a challenge in property insurance," he said.

Shifting responsibilities

Giger said that where risks become uninsurable because of climate change, more of the burden will move away from insurance companies. If, for example, land was rendered infertile by climate change, crop insurance would become ineffective because it would be triggered every year.

"It will be for societies, for domestic governments, to find appropriate responses," he said.

Drzik said the withdrawal of capacity in some areas would present an opportunity for other players to step in. He also said there was scope for the private sector to help finance the public sector's natural catastrophe risks. He gave as examples the Southeast Asia Disaster Risk Insurance Facility and the U.K.'s Pool Re flood insurance scheme, which cedes some of its risk to the private reinsurance market.

"As you get more reinsurance involved behind the scenes, I think it creates opportunities for the industry," Drzik said.