Physical Climate Risks For India’s Insurance Sector

With increasing climate risks, as pronounced emphatically in the recently released IPCC WGII report, India stands to be impacted across sectors. If the last couple of years are any indication, India’s insurance sector has had to bear the cost of increasing number of claims for climate related disasters like cyclone and floods, as acknowledged by India’s insurance regulatory authority, IRDAI’s 2020-21 annual report which acknowledges “several natural catastrophic events…like cyclones and floods”, however failing to provide guidance on risk assessment across climate hazards.

India is one of the most vulnerable countries in the world to climate-induced flooding, heat stress and droughts, according to the new IPCC WG2 report on impacts, adaptation and vulnerability. India is exposed to many flood hazards, from sea level rise, rivers and melting glaciers. Major floods and landslides killed over 700 people and caused USD 11 billion worth of damage in India over the course of 2018 and 2019.

Munichre, India’s largest reinsurer, agrees that storms, flooding and drought are the key weather risks for the Indian region. Since they are unpredictable and extreme, these weather events are driving greater volatility in company losses, which makes structuring insurance solutions all the more challenging. In general, insurers have long relied on ‘catastrophic models’, which use historical loss data to price future risks. However, unprecedented climate conditions have made modelling future losses more difficult than ever before. The potential for major events to overwhelm an insurer’s capacity to absorb climate-related losses is very real. For example, in 2018, the Merced Property & Casualty Company was unable to pay out all claims due to the wildfires in California and as a direct result was pushed into insolvency.

In general, insurers have long relied on ‘catastrophic models’, which use historical loss data to price future risks. However, unprecedented climate conditions have and will further make modelling future losses more difficult than ever before.

Increasing physical risks present challenges, both to market-based risk transfer mechanisms and to the underlying assumptions behind Indian insurers’ business models to spread the risk by re-pricing, since India already has one of the lowest insurance penetration across Asia, and much lower than the global average.

3. A 2020 review of climate disclosures from the global insurance industry, Indian insurance companies were among the worst performers among their global peers. The ability of insurers to articulate their management of climate risk is not only important to their shareholders, but also to the financial stability of the economy. A 2021 climate risk assessment survey across small, large & medium industries in Maharashtra, including the insurance sector, revealed that nearly half feel the need to re-assess business models and planning, while more than a third blame climate for capital destruction. Six out of every ten want to de-risk from climate change, and develop successful risk-transfer mechanisms and pricing which adapt to the external environment.

We’re sharing a briefing compiled by Climate Trends on this issue, along with a document with quotes from sector experts. Please let us know if this would interest you for a story and should you need anything else.

Dr Saon Ray, Visiting Professor, Indian Council for Research on International Economic Relations said “The insurance sector works as a mitigator of financial damage inflicted by untoward events and as a financial intermediary driving funds towards different investment avenues. The climate change risks facing India have the power to compromise both of these imperative functions that insurance plays in the broader economy. The Indian insurance sector faces various challenges such as low insurance penetration and density rates, low rural participation of insurers etc. The market for speciality risks such as natural catastrophes is largely underdeveloped in the country. For example, flood risk in India is quite pronounced but insurance companies bore less than 10 per cent of the actual losses during the Kerala floods in 2018. With the onset of new risks, new risk assessment models will also be need to be thought through, so as to best capitalise upon these opportunities. An area of concern that arises here is the ability of insurers to efficiently price these risks. India’s insurance sector has potential to grow further due to the underpenetrated nature of the market and low density.”

Praveen Gupta, Former MD & CEO Raheja QBE General Insurance Co. Ltd. and Climate Change Enthusiast said “We are in the thick of a Climate Crisis. Its manifestations cannot be dismissed as Act Of God (AOG) or Natural Catastrophe (Nat Cat). The return periods of various climate events are shortening. Hence the risk management, underwriting and pricing ought to be robust. Asset buildup and its aggregates, particularly in fragile geographies, needs to be watched and managed closely. Investments by insurers in anything that adversely affects humans, biodiversity and the environment in general must be avoided. Climate risks are evolving rapidly and getting increasingly complex. Retrospective pricing models will not work; risk modelling too needs to quickly catch up. Insurers will not have the luxury of working in silos. Insurers need to evaluate their portfolios from the perspective of Scope 1, 2, 3 emissions and ensure they are aligned to a Net Zero outcome. Last but not the least, insurers should have Environmental Societal and Governance (ESG) compliant boards.”

Aarti Khosla, Director, Climate Trends said “In 2020-21, the maximum number of insurance claims out of the total in India were due to damages caused by Cyclone Amphan, which caused immense damage in Eastern India including West Bengal. Yet India has the lowest rate of insurance penetration across Asia. Insurance sector is evidently ill-prepared for short-term and immediate climate related risks, while we’re not even discussing how to deal with multi-decadal changes like sea-level rise, heat mapping, drought etc, which is no longer a distant risk, but staring at us within 3-8 decades. The agricultural insurance model has also proven how volatile the conditions in India are for the insurance sector to succeed. The latest IPCC report only corroborates India’s increasing vulnerability to a range of physical risks from climate change which are projected to increase in intensity and compound into cascading disasters. Last year, a climate risk assessment survey across small, large & medium industries in Maharashtra, including the insurance sector, revealed that nearly half feel the need to re-assess business models and planning, while more than a third blame climate for capital destruction. Six out of every ten want to de-risk from climate change, and develop successful risk-transfer mechanisms and pricing which adapt to the external environment.”

Joe Athialy, Executive Director, Centre for Financial Accountability said “Climate emergency is here and now. The recently released report by the IPCC is a clear message about the physical risks that will ensue in the wake of the climate crisis. One cannot continue to be in a denial mode. There are real costs on multiple fronts, including financial, which is not adequately looked into. There is evidence from across the world on how climate disasters can drive insurance companies into the ground given the sizable payouts they will need to make. Insurance companies need to ensure companies provide critical climate related financial disclosures.”

The writer of this article is Dr. Seema Javed, a known Environmentalist, Journalist and Communications Expert