Time for a global reckoning on extreme heat risk

As a global community we confront many challenges, from aging populations to geopolitical instability. It may seem that climate change can take a back seat to these other concerns. But recent research from Swiss Re Institute (SRI) shows it should remain top of mind - and that we must take urgent action to manage the impacts of higher temperatures, or face potentially devastating economic and societal consequences.

The IPCC already expects the global average temperature to reach or exceed the 1.5°C Paris Agreement target over the next 20 years; true enough, 2023 has been the warmest year ever, by a substantial margin. Moreover, the rise in temperatures looks set to continue and bring further physical repercussions. These include more frequent and intense severe weather events.

SRI reiterates that rising losses from extreme weather events are being driven by economic growth and urbanisation, which often result in increasing exposures from accumulated assets in high-risk areas, as well as changing vulnerabilities. But with climate change expected to contribute to the intensification of severe weather events and consequently the associated economic repercussions, it is likely climate change will play a larger role in exacerbating losses in future.

More frequent and/or intense severe weather events would increase the burden on local communities and governments, both in terms of macroeconomic risks and in terms of fiscal spending to cover losses.

Swiss Re data identifies the Philippines, which contends with flooding and tropical cyclones, and the US, which faces increased severe convective storm and tropical cyclone activity, as the countries most exposed to economic damage.

Probability of hazard intensification and probabilistic annual economic losses by peril as % of GDP per country, as of today

A health, as well as a climate, challenge

Perhaps less recognised than potential rising losses from damage to infrastructure is the impact on health of higher temperatures. There is already mounting evidence that record heat is taking a huge toll on workers in places like India, where a study shows it can double the risk of stillbirth and miscarriage for pregnant women. The International Labour Organisation estimates some 70% of workers worldwide are at risk of excessive heat exposure and consequent health risks. 

There is also a potentially significant impact on economic activity and productivity as climate change causes health problems that render more people unable to work. This will also place a profound burden on healthcare systems globally.

According to the World Health Organisation, climate change may cause 14.5 million deaths and USD 12.5 trillion in economic losses by 2050. The toll will be particularly heavy in developing markets, where food and water insecurity is more prevalent and health systems more fragile. There will also be a disproportionate impact on women, who are more affected by displacement and threats to clean water and sanitation facilities. 

If current trends continue, the economic effect of the wave of mortality linked to climate change may last for generations. Globally there is still a yawning protection gap that leaves too many families ruined in the event of the loss of their main breadwinner. SRI estimates that over 50% of global financial needs remain unprotected in the event of a breadwinner's death. There is a staggering USD 409 billion shortfall between the losses caused by the death of the main income provider and existing household incomes - and that nearly doubles to USD 747 billion when it comes to medical expenses. 

Expanding the frontiers of protection

Faced with such a destructive potential cycle of loss, it would be easy to lose hope. But by taking action to help prepare for these events and by using the support available from reinsurers, the world can be put on a more resilient path.

As we've seen in the aftermath of Australia's Brisbane floods, steps such as raising living spaces and improving water management systems can significantly enhance resilience to adverse weather events. 

These initiatives will require commitment, and investment, which can also create new employment and growth opportunities. The challenge lies in ensuring holistic risk assessment and management of such initiatives to give shareholders confidence in their success. This is an area where the re/insurance industry, leveraging its risk knowledge and experience, can play an important role in derisking and enabling risk mitigation, to enhance investment potential and confidence.

In fact, our analysis shows the benefits of the targeted adaptation measures can outweigh the costs involved by a factor of 10 or more. We're actively seeking collaboration with more partners and stakeholders to further research and raise awareness of the benefit-to-cost ratios (BCRs) of adaptation projects, given that measurement will be key to driving meaningful progress.

'AAA' for inclusive cover

Meanwhile, safeguarding health and livelihoods starts with prioritising what we see as the 'three As': availability, accessibility, and affordability.

Closing the protection gap will depend on extending protection to all levels of society that currently lack cover. To improve availability and access we must enhance our understanding of how factors like rising temperatures will change the risk landscape and the losses associated with disaster events and update our models and practices accordingly.

To encourage uptake, we should ensure we are connecting with customers via their preferred channels and are ready to provide guidance or the right products when these are needed most. We can achieve this by investing in the functionality and the features of our digital platforms, as we're doing with digital health underwriting, which accelerates the ability of insurers to develop risk profiles and offer tailored products to customers.

Particularly in emerging markets, these efforts will only yield results if protection is made affordable. By exploring innovative structures such as microinsurance and parametric insurance, in which payouts are triggered by a specific set of conditions, we can put protection within the reach of lower-income earners and ensure extending protection is financially viable for insurers. This will maintain our capacity to act as a shock absorber in future.

Our recent partnership in India to provide protection for female labourers facing extreme heat is an example of how these considerations can be balanced. By combining parametric cover, direct income support and an early warning system for affected communities, the initiative shows how new approaches can shield vulnerable populations from a rising weather risk and potential losses they - and their families - previously would have been forced to bear alone.

Building resilience ultimately lies in partnership

Notwithstanding the re/insurance industry's efforts and progress, enhancing our world's resilience in the face of a changing climate requires close collaboration between both public and private sectors. In this vein, our Public Sector Solutions team actively partners with clients across the private and public sectors to better understand the risk characteristics in various regions to enable development of customised solutions that provide capacity to support resilience.

For example, the Pearl River Delta, located in the province of Guangdong, is one of the fastest growing urban regions globally and is frequently struck by tropical cyclones and excessive rainfall. As well as having a large population, Guangdong is home to several global companies that have production facilities or subsidiaries in the province.

The local government partnered with Swiss Re and local insurers to design a customised insurance solution aimed at improving the resilience of the region. This solution used a parametric insurance cover with a double trigger (i.e. typhoon track and wind speed for cyclone risk and precipitation amount for heavy rainfall risk), covering seven prefectures of Guangdong, and supports the Guangdong Province in building its fiscal resilience against natural catastrophe contingent liability.

We also continue to work with industry associations to deepen our knowledge on the impacts of extreme heat risk, while exploring opportunities in the form of inclusive insurance to support the more vulnerable in society. The recent extreme heat parametric insurance payout for over 46,000 women enrolled in the Women's Climate Shock and Insurance and Livelihoods Initiative (WCS) in India has been encouraging; adopting such an approach could suggest that governments and companies across the world could build climate, health, and economic resilience for societies across the world.