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Climate change and PH insurance industry's response

By Michael F. Rellosa

THE UN Intergovernmental Panel on Climate Change (IPCC) released the first installment of the IPCC Sixth Assessment Report (AR6) on August 9, the complete version of which is supposed to be released in 2022. This report is of the utmost importance and should be made known to all, as in effect, it is a warning to mankind.

This first installment is officially known as the IPCC Working Group 1 report or "Climate Change 2021: The Physical Science Basis." According to IPCC Chairman Hoesung Lee, the report reflects "extraordinary efforts under exceptional circumstances"; he states further that "the innovations in this report and the advances in the climate science it reflects provide an invaluable input into climate negotiations and decision-making."

A long read but the main takeaways are:

1. Faster global warming. The chances of crossing the global warming level of 1.5 degrees Celsius in the next decade or so is more imminent and so are the effects. The global plan to limit warming to 1.5 degrees Celsius or even 2 degrees Celsius will be beyond reach at the rate humankind is going.

2. Every region is facing increasing changes, some more drastic than others. For example, warming over land is larger than the global average, and it is twice as much in the Arctic. Climate change is affecting countries in multifarious ways. For example, archipelagic countries, such as the Philippines and Maldives, stand to lose major portions of their land due to sea level rise. Countries as disparate as China, Italy and Germany are experiencing record rainfall and disastrous floods not seen in thousands of years. The changes are expected to multiply with little or no warning.

3. It is not just about temperature. Climate change includes wetness and dryness, wind patterns, snow, ice, erosion of coastal areas and even changes in oceanic patterns. Examples include more intense rainfall and resultant flooding or the opposite - drought in places that did not have them before, changes in the monsoon patterns, continued sea level rise where extreme sea level events previously occurring once every 100 years could occur yearly. Loss of glaciers and ice cover, permafrost thawing, marine heat waves, oceanic acidification, the destruction of marine ecosystems and the attendant losses to sea life and fisheries are also examples.

The Sixth Assessment Report will provide a more detailed regional assessment of climate change and will focus on useful information that will influence risk assessment, mitigation, adaptation and how to remain resilient in the face of all these.

Insurance is one of the industries that can help mitigate the impact of these changes and assist in a post-catastrophe scenario where the insured populace can rebuild and reestablish their lives and livelihoods greatly increasing their resilience to disasters.

The Philippine insurance industry, with the help of its regulators, the Insurance Commission, and direct or indirect assistance from the World Bank, the GIZ and other organizations are rushing to cobble together a program called the Philippine Catastrophe Insurance Facility (PCIF) with four core objectives:

1. A stronger nonlife insurance industry: The PCIF will enable more insurers to provide coverage against disasters and, thus, promote the financial resilience of the populace and the country's businesses against disasters like floods, typhoons and earthquakes. This includes ensuring that insurers provide timely claims settlement after each natural disaster.

2. Higher insurance penetration over a period: The enhanced ability to develop and offer catastrophe insurance solutions is aimed to be converted into a marked increase in insurance penetration. This requires complementing the advanced supply with complementary measures, primary of which is an education campaign to increase awareness.

3. Adequate and sustainable catastrophe premium rates: As the local insurance industry has limited financial capacity to adequately retain Cat Risks, the PCIF is envisioned to increase Nat Cat premiums of an estimated 30 percent to 50 percent of current market rates via the use of technical proven rates. To ensure the affordability of the Insuring public, this is to be done in increments that would be acceptable to all. The purpose is to ensure a more resilient industry where the premium reserves are sufficient to respond to disasters.

4. Increased local catastrophe retention: When currently, the providers of Cat insurance reinsure primarily abroad, the PCIF will provide the opportunity to leverage on the retention of the Philippine companies in a way that the premium base can be grown internally. Nevertheless, given the nature of Cat Risks, some level of international reinsurance is likely to remain necessary.

Still, in the initial stages of its formation, this initiative needs to be coddled and coaxed into being finalized as a minority of players still need to be convinced to throw their considerable weight and support behind what all seem to agree is an initiative with a noble and timely purpose.


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