Climate change could drive extreme weather losses 40% higher: Researchers

Economic losses from extreme weather related events could increase by 40% by 2040 due to the influence of climate change, according to researchers.

Researchers from the Cambridge Centre for Risk Studies found that climate change could add some $100 billion of additional losses to extreme weather events globally, with an increase of 20% by 2040 possible.

With reported extreme weather losses currently running at an average of around $195 billion a year in direct costs, the researchers believe that this will increase to around $234 billion by 2040, an annual increase in global losses of around $39 billion.

These findings come from the Cambridge Climate Change Business Risk Index, a newly added component of the Cambridge Global Risk Index, which incorporates climate model output to analyse and quantify the increasing risks of extreme weather events and the potential increased global losses associated with them.

In addition, the Centre also looks at these events potential to disrupt business operations and supply chains globally.

As an example, the index shows that by 2040 businesses in Chicago, U.S. could expect a 50% chance of having an additional 20 days a year where average temperatures will exceed 25ºC and an additional week of days above 30ºC.

With the indirect costs from supply chain disruption and other knock-on economic consequences factored in to the expected new run-rates mentioned above, the Centre feels it possible climate change could add more than $100 billion of losses each year to the global economy.

Dr Andrew Coburn, Chief Scientist at the Centre for Risk Studies, commented on the research, “Companies are struggling to reconcile the long range forecasts of the consequences of a warmer planet in several decades’ time, with weather changes that are already impacting their businesses in various ways, and how their business will be affected by the transitions that society is making today towards a low-carbon economy.”

As global economic losses from extreme weather are driven higher by climate change, so too will be insurance and reinsurance market losses.

Not only does the rising loss mean greater impacts to reinsurance capital, it also means a greater need for it, suggesting that the insurance and reinsurance market has continued and increasingly important work to do.

Risk financing and transfer is going to be in a world where the costs of severe weather and natural disasters are seen to be rising.

As a result, it will be vital that the insurance and reinsurance marketplace remains robust, well-funded, able to absorb volatility, so also requiring continued and increasing access to the capital markets as well in order to achieve this (we would suggest).

Just the other week we wrote that, Australia headquartered global insurance and reinsurance group QBE warned parts of the world may become uninsurable, as climate change is forecast to significantly increase claims costs and could make premium rates soar.

Reinsurance capital is seen as a tool to help the world as it adapts, in the provision of weather and catastrophe risk financing and hedging capacity.

But as we’ve also explained in a recent article, it’s vital that insurance, reinsurance and insurance-linked securities (ILS) products are adapted to reflect the changing risk landscape as a result of climate change.