Swiss Re’s climate resilience under different scenarios
The TCFD requests companies to describe the resilience of their strategy taking into account different climate-related scenarios, including one of a 2°C increase or less. In principle, it would be possible for us to compute the potential long-term effects caused by climate change on Annual Expected Losses (AEL) based on today’s re/insurance book. However, we do not consider this to be meaningful, for the following reasons.
Looking at climate effects in isolation would mean ignoring all the other factors that will shape Swiss Re’s future re/insurance book and thus also our future AELs. These include the company’s strategy and risk appetite, market conditions, capital costs, insurance penetration, storm hardening and other climate adaptation measures. Since our re/insurance book and current AELs are the result of a complex interaction between all these factors, any future scenario would have to consider all of them, in the process obliterating the effect of climate change on the resulting AEL.
Moreover, the future AELs for Swiss Re’s weather-related re/insurance book can be seen as a compound assessment of the company’s future market share and scenario projections of overall future business volume and profitability. Independent studies have shown a wide uncertainty range for future market volumes, though (see eg Kunreuther et. al., 2013).1
On a societal level, our Economics of Climate Adaptation (ECA) studies show that climate change can lead to an increase of economic losses due to weather risks of up to 30% within the next 25 years. More importantly, though, economic development, urbanisation, higher population densities and asset concentrations in flood plains are expected to be the dominant factors in increasing weather-related economic losses. As they continue to rise, our models will gradually factor in this trend, since they are updated and refined at regular intervals.
To summarise, we do not consider climate change to be a single factor posing a fundamental threat to the resilience of our business. It is one of many equally important factors we will need to take into account in shaping our future business strategy. A key precondition for our ability to continue acting as ultimate risk-taker is diversification, with regard to regions, business lines, sectors and clients. In a world of strong or unmitigated climate change, however, the proportion of weather-related risks we could re/insure would decline and the protection gap would likely increase further.
1 Kunreuther, Howard; Michel-Kerjan, Erwann; and Ranger, Nicola, “Insuring Future Climate Catastrophes” (2012). Published Articles & Papers. Paper 171..