Under-insuring against climate change: small businesses most at risk
Small businesses, particularly those in low-income countries, tend to be more under-insured than large businesses - which can have devastating consequences for them
CLIMATE change – and its accompanying threat to lives, property and well-being – is escalating, and yet nations and businesses remain under-insured against environmental disasters, says multinational insurance company Munich Re.
This is particularly a concern for less-developed nations and smaller businesses that are less-prepared and more under-insured than their more-developed and wealthier counterparts – as it leaves them more vulnerable to financial damage and economic loss.
Munich Re’s recently published natural disaster review for the first half of this year found that floods, earthquakes and storms caused overall losses of about US$65 billion during the period. That is lower than the US$105 billion of losses recorded last year, but what’s worrying is that the insurance coverage for such losses has not increased, leaving countries and businesses vulnerable to financial and economic losses.
Insured losses for this year amounted to US$34 billion, roughly in line with previous years. The US accounted for about US$28 billion of overall natural disaster losses, with US$19 billion being insured. Europe accounted for US$11 billion of the losses, with insured losses totalling US$7 billion. And, the Asia-Pacific region accounted for US$22 billion of losses, with insured losses amounting to US$8 billion.
“Loss prevention is a fundamental component in mitigating the economic effects of climate change,” says Torsten Jeworrek, member of the Board of Management at Munich Re. “It is therefore extremely worrying that insurance penetration in developing and emerging nations is stagnating at well below 10 per cent and, even in industrial countries, there is much room for improvement.”
Ernst Rauch, chief climate and geo scientist at Munich Re, says the difference in insurance take-up and the level of cognisance around the value of insurance is particularly stark between OECD (Organisation for Economic Co-operation and Development) and non-OECD countries.
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“Typically, high-income countries, that is, OECD and industrialised countries, especially large and international corporations based in these markets, have a higher understanding of risks and have a higher recognition of the value of insurance and are therefore better prepared when it comes to risk management,” he said.
“However, if we look at non-OECD countries, that is, emerging and developing countries, there is often a correlation between the GDP (gross domestic product) level of these countries and insurance coverage, especially for small businesses. The concern is that small business owners are usually not insured or under-insured, especially in low-income countries. In other words: it could be devastating for these businesses if they do not have the right insurance cover to recover financially in case of a severe natural catastrophe.”
Risks to small businesses
While Munich Re is unable to provide exact figures for losses from environmental or natural disasters borne by the corporate sector, Rauch said that small businesses remain largely under-insured compared to large businesses.
“There are several reasons for businesses not having sufficient insurance coverage, including factors such as risk perception, insurance knowledge and limited access to risk-related information. Consequently, undervaluation of assets due to lack of information and awareness can also be a relevant factor for under-insurance.
“(Further), suppose that smaller business owners do not fully understand insurance requirements or underestimate their business growth, resulting in a lack of information about the potential risks involved – in this case, they may not feel insurance cover is necessary for their business operations.”
This is however hardly ideal when the risks to businesses are expected to grow, as environmental and natural events are predicted to worsen. The United Nations’ Intergovernmental Panel on Climate Change (IPCC) has said that the world faces unavoidable multiple climate hazards over the next 2 decades, even if it hits its target of keeping global warming to 1.5 degrees Celsius above pre-industrial levels.
Even temporarily exceeding this warming level will result in additional severe impacts, the IPCC has said, some of which will be irreversible – with risks for society increasing, including to infrastructure and low-lying coastal settlements.
Not just environmental damage
Rauch says natural catastrophes rank amidst the 3 largest risks to businesses – along with cyber and business interruption risks – that would result in the largest financial impact and economic loss.
In addition to these, corporates and businesses should also be aware of the risk of the damage to their reputation as a result of these events.
“Especially with companies working in international markets, delayed delivery of goods or production restrictions after a major loss can provide a competitive advantage to insured versus non-insured companies. In addition, financial flows from insurance pay-outs allow faster recovery from business interruption and shorter downtimes.
“Also, for many sectors, including the food and textile industries, tourism, luxury articles and cosmetics, hacking poses a threat to reputations and success in business. Reputation protection is, therefore, one of the most important components of risk management for this reason as well.”
Solutions
Rauch says the insurance industry is constantly looking for solutions to mitigate or transfer the risks posed by threats such as climate change, pandemics and cybercriminals. This means having a better understanding of the risks through collecting and analysing data on natural catastrophes, cyber and global supply chains.
Having better access to data will allow associated risks to be priced more quickly and accurately, enabling businesses to understand their exposures better, and also make insurance premiums more competitive.
“The challenge for the insurance industry is to focus on the needs of businesses that are uninsured or under-insured. Closing the protection gap will require the industry to continue developing data and analytical tools to track the constantly evolving landscape of new risks and exposures, not only of natural catastrophes but also of perils that are difficult to quantify, such as cyber and supply-chain risks.
“Further innovation in products, processes and distribution are needed to reach previously uninsured consumers and risks,” Rauch adds.
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