Climate Change describes the variation in the long-term average weather conditions which in turn occasionally produces climate extreme values leading to a higher frequency and the severity of major weather events.
For 2021 alumna Nigerian-born Victoria Okesipe Oluwakemi, such events may lead to a higher number of costly claims from property and casualty insurers, which impact their profitability.
“However, by employing appropriate precautionary measures in Risk Management and underwriting, insurance companies react in this changing situation. Hence, we discovered a need to provide research-based evidence that supports the reaction of insurance companies and to also establish a need to intensify their reactions and help insurance regulatory authorities to reflect climate change appropriately in their requirements,” says Victoria Okesipe. Nigerian-born Victoria Okesipe Oluwakemi emerged Third from the 2020-2021 cohort with Distinction and her research essay titled “Correlation of Global Climate Data and Insurance Industry Performance”, could be a treasure for the insurance industry.
While the ability to model and investigate global climate data and insurance performance indicators to establish empirical relationships without producing spurious results is a non-trivial task, this study investigates the causal relationship between global climate change and insurance industry performance between 1993–2019.
“We have made the assumption that climate change potentially has a negative impact on the performance of the insurance industry. This assumption is tested using econometric time series analysis methods including unit root tests, correlation, Granger cointegration and causality tests. Cointegration between climatic variables and insurance performance indicators is confirmed. While our results also suggest that a long-term rise in global temperatures negatively affects the global insurance business with a severe effect noticeable for claims and premia in Europe and Oceania as revealed by the Granger causality test results,” explains Victoria.
If the results of this study also suggest there is evidence that shortcomings experienced in the insurance industry in the past few years are related to climate change, what practical measures should governments, regulators and insurance companies take to mitigate the negative impact of Climate Change? Victoria offers the following recommendations:
RECOMMENDATIONS
■ Governments should do more to reduce the impact of climate change on the insurance industry as this can affect economic growth and development.
■To control the effect of climate change and stabilize the affected economies, policymakers should focus on two strategies. The first is providing financial support to those most affected by dangerous weather events in such a way as to relieve the financial burden on insurance companies. The second strategy is making public investments and other policy choices that help minimize the impact of climate change in general.
■ With growing evidence that there exists some relationship between climate change and insurance performance, insurance companies could offer financial incentives, like reduced premiums to companies that have climate-friendly operations. Insurance companies should also consider recalculating their premiums to factor in climate change realities. This would involve updating their existing models to capture a more realistic impact of climate change on their performance. Other recommendations include developing products that cover climate-related risk specifically.
■ Governments and Regulators could also challenge cities into transitioning towards 100% renewable energy and also address local climate threats by implementing practical measures that improve air quality, protect water supply and reduce urban flooding.
■ Regulators can also moderate the activities of insurance companies by providing regulations in relation to the impact of climate change on the performance of the insurance industry. They can also subsidize insurance premiums so that companies do not shut down due to high premiums associated with natural disasters.
■ Regulators shall require insurance companies to do a more conservative risk capital allocation to be prepared for higher claims due to natural disasters/climate change. This means reducing dividends to shareholders. In this way, capital owners contribute to compensate for damages caused by climate change.
