Swiss Re: lessons from the parallels between COVID-19 and climate change

“It’s easy to forget that there was a time before COVID-19, when other urgent issues were still in the headlines. Our mission of making the world more resilient calls on us precisely not to lose sight of other big risks.” Edi Schmid, chairman of the Swiss Re Institute and Swiss Re’s group chief underwriting officer, Swiss Re.

· COVID-19 must not push other urgent issues off the table  
· Drastic action will help avoid most damaging consequences
· Unsustainable urban sprawl a key factor in escalating insured losses
· Swiss Re to employ carbon capture from next year

Climate change will not take a backseat while the world deals with COVID-19, say Swiss Re, as it unveils its latest sigma report and discusses its climate change strategy.

There are clear parallels between the COVID-19 pandemic and climate change for the re/insurance industry, according to Jérôme Jean Haegeli, Swiss Re’s chief economist.

“However, while there are clear parallels, there are also very important differences,” he added, as he discussed the reinsurer’s climate change strategy and its sigma study: “Natural catastrophes in times of economic accumulation and climate change risks”, during a virtual roundtable event on April 7, 2020.

“For the parallel, climate change and COVID-19 are both global crises. But the difference is that the pandemic will end at some point, and climate change will not,” he said.

Edi Schmid, chairman of the Swiss Re Institute and Swiss Re’s group chief underwriting officer, said the world is in the grip of this pandemic , which is dominating daily life like no other event in many years.

“Like many of you, I have been disheartened by the many human tragedies from this crisis, but I’ve equally been touched by the many acts of mutual support and care to deal with this crisis,” Schmid said.

He reiterated earlier announcements from the reinsurer that while the financial impact is still uncertain, Swiss Re deems it “absolutely manageable”, highlighting the “very strong balance sheet” and “prudent asset allocation” and “hedges on our assets”.

Don’t lose sight of other risks
Schmid said: “It’s easy to forget that there was a time before COVID-19, when other urgent issues were still in the headlines. Our mission of making the world more resilient calls on us precisely not to lose sight of other big risks.

“Even though it’s more gradual than a rapidly spreading global pandemic, climate change is one of the most pervasive threats facing us, our planet, our society and our economy.”

“Climate change is one of the biggest risks for the re/insurance industry,” he added, and because of this the reinsurer is committed to applying sustainability criteria across all of its activities—in underwriting and asset management, but also in its own operations.

“Obviously, our nat cat business is exposed to this risk which is why we are devoting the nat cat sigma to the theme of climate change,” he said.

The sigma report shows that climate change is increasingly visible in loss figures and evident as a major risk driver combined with ongoing urban expansion in highly exposed areas.

“We are literally living, working and building in the very locations most at risk: along the coast and floodplains,” Schmid said.

“We believe the insurance industry and Swiss Re can play a big part in developing a resilience strategy and help communities recover after disasters.”

For 2019 alone, Swiss Re’s P&C reinsurance business paid out for claims worth more than $11 billion; $2 billion of these claims were related to nat cat losses “helping many families and businesses to recover afterwards”.

A need for deep knowledge around these risks has driven the company to invest in research and development, something it has been doing for decades, to keep on top of these risks and develop its own proprietary risk models around nat cat and climate change.

“I started my career at this company in 1991 and one of my first projects was to assess how climate change may impact the frequency and severity of European winter storms and hurricanes in the North Atlantic,” Schmid commented.

He said the secondary focus for climate change is around reducing carbon emissions, known as the transition to net zero.

“It’s clear we cannot adapt endlessly to the growing risk of climate change, we also need to tackle the source, which means reducing carbon emissions,” Schmid explained.

Drastic action
Commenting on another parallel between COVID-19 and climate change, the CUO said: “The earlier we take action the more we can keep the risk manageable in the longer term and avoid the most damaging consequences.

“We have to take drastic action to bring down emissions to net zero by mid-century and pave the way for a net zero future. Swiss Re, with our businesses, is committed to be net zero on our operations side by 2030, and on our asset investment side and underwriting side by 2050.”

While the company is a pioneer of environmental, social, and corporate governance (ESG) greening criteria and investment and has been carbon dioxide-neutral for a long time, Swiss Re said it felt this was not enough.

As a result, Schmid said, for every tonne of carbon dioxide that cannot be avoided during its operations, another tonne will be removed from the atmosphere and stored permanently.

“As of next year we will ramp up an internal carbon levy, so we have an incentive to fly less and generate funds to purchase carbon removal certificates. as clearly carbon capture has to be part of the long-term answer.”

For a company that strongly emphasises the importance of its client relationships, it is no surprise that Schmid said its climate change strategy relies on partnering with clients to find solutions to mitigate and adapt to climate change risk.

“We obviously cannot deal with this in isolation. Together with our clients and partners in the insurance industry, in other industries and the public sector we try to come up with solutions. I can hardly remember any interaction with external stakeholders where climate change has not been a topic over the last two years,” he said.

Sigma top three findings
Nat cat insured losses for 2019 were $52 billion, lower than the 10-year average, which is $67 billion. While 2019 followed two costly back-to-back years: 2017 and 2018.

The key nat cat events in 2019 were the typhoons in Japan and the bushfires in Australia, which drew the market focus.

The third key finding was that in addition to climate change, economic development and urbanisation were the main drivers of increasing losses.

Haegeli said: “The rising losses from secondary perils as well as latest research on primary perils clearly show that climate change is an amplifier. 2019 was the second warmest year on record and we have a real sense of urgency in our report.

“We need to take climate action, and we need to take it now, for the benefit of society and to build economic resilience.”

Urbanisation is a major factor, according to Swiss Re’s report. Haegeli quoted an “amazing statistic” in relation to this: “the world is building an entire New York City every month for the next 40 years”.

“That’s why it’s even more urgent that we take a long-term view on climate change and that we act now. Our industry is thinking about the long term and providing knowledge and services, so we also adapt over the long term and provide solutions for the climate crisis needs, with transformation and switching to renewables,” he added.

“We also need to support adaptation and innovation and provide insurability so we have the risk-taking capacity to adapt and move to a new world of low carbon emissions.

“My wish would be that COVID-19 is a wake-up call, and we don’t just take action on the pandemic which is necessary and needed, but we also take action together with the public sector and industry in adapting to climate change.”

Urban spread
Returning to concerns about the sprawl of urbanisation, Martin Bertogg, head of catastrophe perils at Swiss Re, said that this growth coming on top of climate change means something in that risk landscape.

This is the “big learning” discussed throughout the sigma study: that these dynamics have various factors that combine, he added.

“We as humans but also the insurance industry, our typical way of looking at these risks from natural perils and disasters is to look backwards, taking an average of a longer term historical observation period for temperature.”

But, he said, the future depends on the climate adaptation path that is taken, meaning there might be quite different outcomes in terms of global temperature. There might also be different outcomes in ongoing urbanisation.

“It’s about being forward-looking rather than backward-looking in the industry, which you might think is standard but that is the learning, that’s what we have to do. We have to consider challenging this paradigm that the past is the best measure for the future.

“Climate change is clearly very valuable and important in this mix to make the future look different from the past,” he said.

Returning to the current pandemic, Schmid concluded that the COVID-19 crisis is a reminder of historic pandemic risk, adding that many people may have underestimated this exposure in the past.

“I would expect to see an increased awareness and demand for pandemic coverage,” he explained.

“As an industry we need to be very realistic about our role around managing a risk like pandemic because of its clearly systemic nature. As with other risks of that type, for example terrorism and accumulating cyber risk, the insurance industry can contribute a lot in terms of risk management services and increasing the awareness and understanding of risks.

“It can make some cover available for pandemics as we do. Most of the mortality policies would, obviously, cover deaths from COVID-19 or from a pandemic. But as I have previously pointed out, the systemic nature is so broad that this cover can be provided only to a limited extent. It needs to be clearly defined and an adequate premium needs to be charged.

“But the systemic nature as it also correlates with the financial market means that it cannot be diversified well, so it needs government involvement to make it manageable.

“We’ll try to do more but clearly the capacity to take such systemic risk off the insurance industry is limited.”