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Climate Disasters May Double Insured Losses, Vermont's Climate Superfund Act, 'Just Adaptation' Toolkit, and More

Swiss Re says natural catastrophes caused US$108bn of insured losses last year

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Insured losses from natural catastrophes to double in a decade says Swiss Re, how World Bank credit data could spur adaptation and resilience financing, Vermont lawmakers push ahead with Climate Superfund Act, study shows heatwaves are moving slower, lasting longer, and travelling further, and Oxford University-backed Just Adaptation toolkit earns Innovation of the Week.

Last week, Climate Proof analyzed S&P 500 earnings call data to uncover trends in how climate risk, adaptation, and resilience is discussed by blue chip executives. Check out the article HERE and become a premium subscriber to receive features like this every Thursday.

Swiss Re’s Natural Catastrophe Roundup Underscores Adaptation Need

It’s the sort of headline you wish was an April Fool’s Day joke: insured losses from climate risks and other natural disasters could double in ten years.

That’s according to reinsurer Swiss Re, which published its annual sigma report on natural catastrophe impacts last week. The paper says climate shocks and other events caused US$108bn of insured losses last year, the fourth year in a row that tally has exceeded US$100bn. Economic losses — insured plus uninsured losses — came to US$280bn, meaning 62% were uncovered.

The paper claims insured losses are likely to increase 5–7% over the long term, in keeping with the experience of the last three decades, leading to a doubling of losses over 10 years.

A key driver of this worrisome estimate is the growth of property exposures. Notably, there’s been a buildup of exposures in climate risk-prone areas — which means when shocks occur, they are impacting a larger number of properties, including high-value properties that further amp the insured losses number. For example, the report says that of the 8% increase in severe storm insured losses last year, just one percentage point was estimated to be a direct result of climate change, while 2.3 percentage points were attributed to economic growth, urbanization, and spatial expansion.

The sigma report also underscores how smaller climate shocks are happening more frequently, driving the insured loss toll higher. Last year, there were 142 natural catastrophes that triggered insured losses, most of which cost US$1-5bn each. These “medium severity” events have increased 7.5% each year since 1994, around double the 3.9% increase for all catastrophes. 

By reducing future vulnerability and increasing resilience, the cost of insurance coverage can be brought down, allowing rising insurance take-up and safeguarding insurance industry sustainability.

Swiss Re, ‘sigma: Natural catastrophes in 2023: gearing up for today’s and tomorrow’s weather risks’

Some of these events are revealing previously underappreciated vulnerabilities. For example, hail storms are inflicting damage to aging rooftops and fragile roof-mounted solar panels. 

How does Swiss Re recommend we push back against the rising cost of climate risks? Yup, through adaptation. The report cites enforcing and expanding building codes, establishing flood control infrastructure, and renovating existing buildings as specific measures. It also offers a more controversial option: discouraging settlement in high climate risk zones. 

In the report’s list of potential climate adaptation actions, governments feature heavily. Swiss Re says governments can set the rules and incentives necessary to alter building codes, zoning, and settlement practices. Government support is required to mobilize private finance for climate change adaptation, too. Interestingly, the only recommended action for insurers in the list is to “encourage risk reduction through price signals and underwriting standards.”

Surely, private investment in climate adaptation is something insurers can and should help mobilize alongside governments, considering their direct exposure to worsening climate shocks. Waiting for lawmakers to unlock private finance alone is a risk that all climate-vulnerable companies, including Swiss Re, can’t afford to take.

Could Credit Data Transparency Spur A&R Investment?

Speaking of incentivizing adaptation investment, the World Bank may do just that by releasing a wealth of previously unpublished credit risk data on private and public investments in emerging markets.

The “sought-after proprietary statistics” include sovereign default and recovery rate info dating back to 1985 and nearly 40 years’ worth of corporate default rates. Together, the datasets show — at a high level, at least — that investing in emerging markets may not be as risky as private financial institutions have come to believe. This knowledge may in turn help spur financing of adaptation and resilience (A&R) projects in those countries most in need of them.

The sovereign data shows that defaults in the International Bank for Reconstruction and Development (IBRD) portfolio average 0.7% a year, and that the lender generally recouped 90% of the amounts owed when borrowers collapsed. The highest default rate over the period surveyed was 4.5%, and the lowest 0%. The highest loss to the World Bank following a borrower default was 58.5%.

On the private corporate side, the data shows a portfolio default rate for the International Finance Corporation (IFC) of 4.1% from 1986 to 2023. Last year, the default rate was just 1.5%. The World Bank says this illustrates the “untapped potential and resilience of private sector investments in emerging markets.” However, the data also lays bare the volatility of this default rate, with 7%+ peaks in 1986, 1991, 1998, 1999  and 2003.

Default Rates by Counterparty Cohort from FY86 to FY23 and Long-Term Average

Still, the data should help supplement private financial institutions’ own loss experiences and third-party datasets — and in some cases change the risk/return calculus for A&R investments in Africa, South Asia, and Latin America, among other regions.

Vermont advances Climate Superfund Act

Back in February, Climate Proof covered the growing momentum behind ‘Climate Superfunds’ in the US. These are government-mandated piggy banks for financing climate disaster recovery and A&R efforts, paid for by big polluters.

Last week, Vermont moved one step closer to making its own fund a reality. On Friday, the state senate voted to advance S.259, The Climate Superfund Act,  which would set up a reserve to pay for “climate change adaptive or resilience infrastructure projects.” Contributions to the fund would be extracted from fossil fuel businesses that produced one billion or more metric tons of greenhouse gas emissions between 2000 and 2019.

A third reading of the bill will take place on Tuesday, where it will then move to the state House of Representatives for debate.

Heatmap’s Emily Pontecorvo offered a good breakdown of the Climate Superfund movement last week, including the important role played by the advance of “attribution science.” This refers to our growing ability to calculate the economic losses inflicted on a region by human-induced climate change and trace the causes back to specific climate polluters. Attribution science lends intellectual heft to superfund proposals, and should allow for a fairer distribution of climate adaptation, resilience, and recovery costs going forward.

If Vermont lawmakers add political legitimacy to the superfund approach by voting S.259 into law, it could help similar bills in New York, Maryland, and Massachusetts progress through their respective legislatures. It may also enable federal superfund efforts to gain traction, something pushed for in the past by the US Senator for Vermont, Bernie Sanders.

Sluggish Heatwaves May Force Adaptation Rethink

Heatwaves are lasting longer, moving slower, and traveling further as climate change progresses, a new study shows. The findings suggest that heatwaves will produce “more devastating impacts on natural and societal systems in the future if GHG keep rising, and no effective mitigation measures are taken.”

The study ups the ante for heat-focused adaptation investments, which are needed to keep cities livable and economies thrumming in places where high temperatures can be crippling. 

According to the study, heatwaves slowed by about 9 kilometers per day each decade between 1979 and 2020, and now last about four days longer on average than they did 40 years ago. They are also becoming more frequent, with around 98 happening per year between 2016 and 2020 compared to 75 per year between 1979 and 1983.

💡Innovation of the Week💡

Infrastructure acts as the bones and muscle of national economies, facilitating the movement of goods, people, and information.  Its importance was thrown into stark relief last week with the tragic collapse of the Francis Scott Key Bridge in Baltimore. The disaster claimed the lives of six construction workers and has snarled traffic at the Port of Baltimore — which handles US$80bn of freight a year.

Climate shocks have the potential to knock out infrastructure on a grand scale. Think flooded roads, storm-ravaged harbors, and fire-blasted railways. Around the world, and particularly in developing countries, adaptation measures are urgently needed to protect infrastructure from these shocks. But how to identify those projects most in need of safeguarding? 

The University of Oxford’s Environmental Change Institute (ECI) is working on one answer. Their ‘Just Adaptation’, or J-ADAPT, toolkit is being built to help investors and civil society figure out how to maximize the economic and social returns of infrastructure projects. By fusing infrastructure system analytics with metrics on social vulnerability and nature, J-ADAPT will allow for better informed economic and financial appraisals of adaptation projects and ensure they are “resilient, impactful and socially just.”

GRI Risk Viewer, Drought Risk Snapshot

The toolkit is the offspring of the Resilient Planet Data Hub, an open climate data platform convened by the UN Office for Disaster Risk Reduction, the Insurance Development Forum, and the University of Oxford. A Global Systemic Risk Assessment Tool built using the Hub’s capabilities will form the foundation of J-ADAPT.  This purports to be the only “open, globally consistent and holistic physical climate risk platform” in operation.

J-ADAPT will be built out with an investment from the Howden Foundation, the philanthropic arm of Howden, a global insurance group that’s supported research on climate shocks. The intention is for the toolkit to be open for all to use. 

“Much of the estimated $360+ billion per year needed to adapt to climate change is related to infrastructure — schools, hospitals, water, energy, transport and nature-based solutions — with economic benefits of at least $4 for each dollar invested and the social benefits far higher still,” says Professor Jim Hall, who leads the Oxford Programme for Sustainable Infrastructure System at the ECI.

“But these investments have been stalled by lack of access to reliable, high quality and relevant climate and risk information. The fact that the tool is fully open and accessible levels the playing field in access to high quality information between stakeholders and ensures the most vulnerable communities have access.”

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