Climate change and the Insurance

Jolaolu Fakoya ACII, APRM

2010
Industry

Climate change has raised the losses in other parts of the world and
hence insurers and reinsurers are increasingly cautious in pricing and
underwriting. This document highlights how the Nigerian Insurance
Industry is responding to such changes.

18/08/2010
Part of a communiqué issued at the 2010 International
Education Conference of the Chartered Insurance
Institute of Nigeria (CIIN) recently concluded in
Abuja, addressed the need for operators in the Nigerian
Insurance Industry to take active steps to ensure proper
profiling and rating of climate and environmental risk
factors. The question however is what climate change
and its financial effects are.
Climate Change, its causes and environmental
effects
“How did no one see it coming?” – Elizabeth II
Climate change is the change in the state of the climate
as a result of human activities (directly or indirectly) or
Natural causes. These changes alter the state of the
atmosphere. When the cause is natural, the change is
synonymous with Global Warming. The changes are
evident in the variability of the statistical properties of
the weather over-time.
The causes of such changes are emissions from fossil
fuel combustion, cement manufacture, ozone
depletion, animal agriculture and deforestation, solar
radiations, volcanic eruptions, mountain building,
changes in greenhouse gas concentration and emissions
and so on.
Human beings are exposed to climate change through
changing weather patterns (temperature, precipitation,
sea-level rise and more frequent extreme events) and
indirectly through changes in water, air and food quality
and changes in ecosystems, agriculture, industry and
settlements and the economy. According to a literature
assessment by Confalonieri et al, the effects of climate
change to date have been small, but are projected to
progressively increase in all countries and regions.
With high confidence, scholars like Confalonieri
concluded that climate change had altered the seasonal
distribution of some allergenic pollen species. With
high confidence, IPCC (2007d:48) projected that:
 the health status of millions of people would be
affected through, for example, increases in
malnutrition; increased deaths, diseases and injury
due to extreme weather events; increased burden
of diarrheal diseases; increased frequency of
cardio-respiratory diseases due to high
concentrations of ground-level ozone in urban
areas related to climate change; and altered spatial
distribution of some infectious diseases.
Globally, Climate change is making headlines but in
this part of the world, it is given little or no attention
probably because Nigeria and the rest of Africa are not
overly exposed to such natural disasters as with Europe
and Asia. That, however, does not make the risks we
face disappear.
This is because we also undertake the activities that
alter the statistical properties of the climate in this part
of the world.
Sigma reports that a total of $62bn worth of economic
losses were suffered in 2009 as a result of such natural
disasters and out of this, only $26bn worth was
suffered by insurers. Also, 15,000 lives were lost to a
total of 288 catastrophic events.
In Africa, 26 catastrophic events were suffered which
represents about 9% of the world total, 932 victims lost
their lives which represent about 6.2% of the world’s
total. Africa suffered $483m out of the $62bn worth of
losses and of this $483m, only $180m were insured
against.
Thus Nigeria and the rest of Africa are not immune to
these disasters and should stop acting that way.
How is the Industry responding to these?
“The secret of getting ahead is getting started” – Agatha
Christie
Insurance is the business of risk. Insurers have built up
a detailed body of knowledge of the loss causes
associated with many of the risks anticipated from
climate change such as extreme weather or complex
liability regimes. Through each of its 3 functions –
Underwriting, Claims management and Asset
management – the insurance industry can play a central
role in dealing with climate change, and to articulating a
framework under which public policy should be framed
in order to avoid unsustainable risk creation and accrual
in our approach to climate change.
Insurance in Nigeria act fairly to exclude such risks.
The Industry should be reminded that the ultimate goal
of insurance in any economy is to maintain stability by
allowing people and businesses to focus on value-
creating activities rather than worry over threats to their
businesses which could affect productivity.
General Business
In the case of property damage, having the property
insured for damage assures that the property will be
repaired and returned to use – so the people and
businesses associated with it can resume economic
activities – which has broad public benefits.
General Insurers can also use their roles to influence
building code requirements and new technologies
before accepting risks. Also, exclusion and limitation
clauses on its public liability contracts would ensure
that companies reduce climate change activities.
Life Insurers
These questions cannot be answered without
comprehensive industry research. Thus, heavy
investments in research and development must be
undertaken by the industry as a whole.
“There are risks and costs to a program of action. But they are
far less than the long-range risks and costs of comfortable
inaction”. John. F. Kenedy
References
SwissRe’s Sigma Report: Natural catastophies and man-
made disasters in 2009

Recently in Nigeria, there was an acid rain scare that Zurich FSG: The Climate risk challenge
got people panicking. Acid rains could result from gas
lbl.gov: Insurance in a climate of change
flaring activities which was the major activity in the
Niger/Delta region. The effect of such rain is to acidify World Rainforest Movement: Nigeria: Gas flaring – major
lakes and streams, damage vegetation, pollute air and contributor to climate change and human rights abuses
cause leukemia or asthma, amongst other things.
NIA: 2009 Nigeria Insurance Digest
Other effects of climate change include food and water
shortages, malnutrition and consequently death, NIA: 2007/2008 Annual Reports and Insurance claims
diseases and prolonged injuries, cardio-respiratory
diseases, cancer, infectious disease etc. Confalonieri et al, 2007

Consequently, mortality rates would rise well over the En.wikipedia.org/wiki/climate_change

rates in use there-by leaving life offices to bear the
losses that may also be coupled with loss of investment QFINANCE: The Ultimate Resource
in properties that are also exposed to natural disasters.

At a higher level, insurers can manage these risks by

pooling through the traditional reinsurance mechanism
and increasingly through capital market activities by
issuing insurance-linked securities, as an important
asset class that is generally uncorrelated within-class
and with other asset classes.

In conclusion, the industry has to be proactive in

identifying such risks and building such models so as to
recognize them in premium rates. NIA insurance digest
and annual insurance reports and claims show that total
industry claims have been rising year-on-year since
2003 averaging 25% pa till 2007 and jumping to 124%
in 2008. Can the rise in claims be attributed to
deepening insurance penetration, increase in moral
hazards or are the effects of climate change implicit in
these claim costs???
Jolaolu is a specialist in Actuarial matters especially in the areas of Pension & Employee Benefits
and Insurance. He is a Member of the Institute of Actuaries, UK
Comments, suggestions and topics are welcomed.
e-mail: jollyfakey@yahoo.com