The flooding in Libya last week added to the list of natural disasters that could be traced to anthropogenic (human-caused) climate change. The American Meteorological Society reported that every major study on heatwaves and extreme rainfall events is traceable to human influence on climate change. Climate change has increased the number and intensity of extreme sea level events associated with tropical cyclones and affected the intensity of other extreme events such as flooding. This increases the vulnerability of small island states, low-lying cities and coastlines.
Take a drive to Manzanilla to view the damage caused by one storm which destroyed houses and a large part of the coastal road. Between 1970 and 2019, the Caribbean, Central and North America accounted for 18 per cent of worldwide weather and water-related damage recording 1,977 disasters, 74,839 deaths, and losses of US $1.7 trillion. The US accounted for 38 per cent of global economic losses. Storms and floods were the most prevalent causal factors (WMO).
Climate change is not new. Countries have debated ways to combat climate change since the 1990s. There have been 27 conferences under the United Nations Framework Convention on Climate Change (UNFCCC). They have resulted in the Kyoto Protocol in 1992, the Paris Agreement in 2015 and the Sendai Framework for Disaster Risk Reduction. Whilst governments have generally agreed on the science behind climate change, they have disagreed on who is most responsible, how to track emission targets, and how to compensate harder-hit countries.
As NGC’s CEO Mark Loquan pointed out last week, greening an economy is an expensive business.
Those changes must be financed, diverting funds from current expenditures that would impact every citizen. Like many countries, although those commitments have been translated into targets, T&T has not pursued these targets with any immediacy. T&T’s declared goal is to reduce emissions in industry, power generation, and transport by 15 per cent by 2030. Actions to achieve these targets have been slow as those changes are expensive and unpopular with citizens. The negative reaction to TTEC’s proposed rate increases exemplifies the resistance.
To meet these goals T&T must increase its use of renewable energy and use up to 50 per cent less natural gas to generate electricity and increase the price of electricity to its true cost. This means that citizens must be allowed to install and operate renewable energy devices, currently illegal under the TTEC Act. The country needs fewer, more efficient public transport systems and other measures to reduce traffic congestion. The reality is that T&T is energy inefficient meaning that the country uses more energy than required to generate its output. There are only seven years to 2030. Making these changes in a short timeframe will have destabilising effects.
This will be a lot for consumers to digest. Other factors affecting citizens must be included. Insurers serve a critical role in the economy as investors, risk managers, and a risk transfer resource that helps protect policyholders from loss and assists in recovery from climate-related disasters. Insurance costs will increase. Most general insurance contracts are reinsured abroad meaning that domestic casualty risks (except motor) are shared by international casualty risk-takers (reinsurers). Currently. Domestic insurance companies are faced with unfriendly reinsurers as they are not paying the reinsurance premiums on time as they cannot access the necessary foreign exchange. This is an immediate danger.
This situation is complicated by the fact that losses from extreme weather events increase insurance premiums. Based on IMF calculations, the Financial Times argues that the entire financial system has underestimated the impact of climate change. Agriculture is among the most vulnerable sectors as it is affected by weather and water scarcity. So is tourism, but a country could survive without tourism but not without food.
The world is reeling from record-breaking heatwaves, wildfires, rainfall, and devastating floods which accounted for 56 per cent of all insurance losses between 2018-22 according to Moody’s. Lives lost and people dispossessed give some measure of the damage.
But the cost can also be measured in the economic value destroyed, and potentially created, as governments shift policies to contain or mitigate the climate crisis. In a world that is rapidly becoming more vulnerable to extreme weather events, outdated assumptions about asset values also need recalibrating.
Insurance companies have managed to survive, regulatory issues, fraud, weather unpredictability, and changing consumer patterns. The increasing complexity of climate change is challenging insurance companies to adjust in other ways. Two top US insurers, Allstate and State Farm have stopped writing insurance business in some US states (California) as there is no point in accepting businesses that generate losses that could make an insurance company insolvent.
To make the point pellucid, in evidence before a Senate subcommittee on insurance and wildfires on March 8, Dave Burt, CEO of an investment research firm, said that “there simply isn’t enough money being collected to cover the costs related to climate change as the risks keep increasing”. He estimated that premiums for wildfire coverage amounted to USD 1.5 billion compared to $9 billion in claims in 2021.
How the insurance sector adjusts to this increasingly risky environment is a leading indicator of how the change would affect the T&T economy.
Mariano Browne is the Chief Executive Officer of the UWI Arthur Lok Jack Global School of Business.
