Buried deep underneath the 3,675 pages of the Intergovernmental Panel on Climate Change (IPCC) Sixth Assessment Report is this sentence—“…in Mumbai (India) SLR [sea-level rise] damages amount to US$49-50 billion by 2050 and could increase by a factor of 2.9 by 2070.” Mumbai is India’s financial capital, and its image has been one of resilience in the riskiest of circumstances.

Through torrential rain, neck-deep flooding, and the more recent cyclone activity, headlines in newspapers have often pushed the narrative of Mumbai ‘bouncing back’ within a day and going back to ‘business as usual’. However, the increase in climate-related hazards now remains a real challenge for the city. The IPCC report, perhaps for the first time, quantifies the damage, and gives the city and its developers a reality check— that business cannot come at the cost of an entire city.

It’s not just Mumbai that the report forewarns. It predicts Lucknow and Patna are among the cities that will reach unsurvivable wet-bulb temperatures of 35°C by the end of the century in a high-emissions scenario. Bhubaneswar, Chennai, Mumbai, Indore, and Ahmedabad are likely to touch 32-34°C, the report states. Wet bulb is a reading of heat combined with humidity, and comes with a higher limit of 35 degrees, beyond which impact to human life is irreparable, and is getting much worse for India.

It is not the first time that scientific evidence points to climate change as being human-induced. This, coupled with the high confidence levels of the report’s predictions, makes insurance companies’ ‘Act of God’ clause more or less redundant. The population of urban India (which is where most of the insured live) is projected at 877 million by 2050, nearly doubling from 480 million in 2020. Insuring them all against climate-related loss and damage is a daunting task.

India’s market for speciality risks, such as natural calamities, is still in the nascent stage. The risks outlined in the IPCC report, therefore, raise pertinent questions about how Indian insurers can manage their businesses in a sustainable and profitable way given the uncertainty.

The damaging link between geopolitics, climate and food security

The ongoing Ukraine-Russia crisis has revealed the fragile connections between geopolitics, trade, climate and food security. At times of global crisis and supply chain disruptions, when countries will turn inwards for food production, loss of agricultural productivity due to climate change will mean a triple trouble of low productivity, tight supply and rising prices. The concerns of Africa and parts of Asia about the Russia-Ukraine conflict are pointing towards rising food prices—Russia and Ukraine produce nearly a third of the world’s wheat.

The IPCC findings warns salt-water intrusion from sea-level rise is likely to hit India’s agricultural yield. Production of staples such as rice, maize will fall by a staggering 30% and 70%, respectively, in a high emissions scenario. Food affordability and economic growth will be under threat as well. Droughts and water stress will further exacerbate the problem and also become a factor in civil conflicts, according to the report. It especially predicts heightened risks for megacities Kolkata and Delhi, which are already reeling under severe water stress. The cumulative scientific evidence is unequivocal, in IPCCspeak.

Climate change a threat to insurers’ business models

With climate disasters quickly becoming part of the ‘new normal’, Indian insurance companies have been dealing with an increasing number of claims for climate-related disasters like cyclones and floods, as acknowledged by Insurance Regulatory and Development Authority of India (IRDAI’s) 2020-21 annual report. The report revealed outstanding claims for natural disasters in 2020 and 2021 reached ₹1,705.52 crore. Of these, only 29.72% claims worth ₹760.68 crore have been settled, so far. It, however, failed to provide guidance on risk assessment across climate hazards. And that’s where the crux of the problem lies.

The pricing of future risks is generally based on ‘catastrophic models’, which rely heavily on historical loss data. But rising climate disasters have had unprecedented impacts. This has made modelling future losses next to impossible.

This, coupled with the sheer volume of the number of claims after each event, is translating into major financial losses for insurance companies. For example, in 2018, the Merced Property & Casualty Company was unable to pay out all claims from the wildfires in California and as a direct result was pushed into insolvency.

Is hiking premiums a way out?

Insurers often resort to repricing insurance premiums on an annual basis to mitigate financial losses. But this is not a sustainable solution as it could lead to concerns regarding availability and affordability for consumers. Industries and places where assets are harder to insure are likely to see their premiums and profits shrink or disappear altogether. Some experts believe collaborating with customers to develop adaptation and mitigation measures for future climate risks would be a lot more effective than continuous premium hikes.

But before all that, it is important to note that India’s insurance penetration stands at 1% of GDP, which is much lower than 1.85% in Asia and 2.8% globally. This makes it much harder for insurers to spread costs across its customers and to account for the frequency, severity and interconnectivity of risks. Increasing this penetration percentage is also an unenviable task because climate change is projected to reduce India’s GDP by around 2.6% by 2100, even in a below 2°C warming scenario. This would put a huge question mark over customers’ ability to purchase insurance coverage.

Insurers must adopt a more proactive approach

Indian insurance companies have been consistently ranked below average in management of climate risks compared to their international counterparts. The lack of government guidelines is an understandable obstacle. But recommendations by the Task Force on Climate Related Financial Disclosures (TCFD)— formed by the G20 Financial Stability Board—are now considered the gold standard of climate disclosure and corporate management.

Financial stress tests, such as those adopted by the Bank of England for the UK’s insurance sector, are also a good way to gauge insurers’ climate crisis response plans. An interventionist approach is not something India’s Reserve Bank of India (RBI) has practised, but it has acknowledged the impacts changing climatic patterns are having on the country’s economic activity. That is a step in the right direction.

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