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Insurers Brace for Risks of Changing Climate

Copyright © 2021 Energy Intelligence Group

Experts agree that recent extreme -- and highly publicized -- events such as the wildfires in Australia and California or floods in Venice were not caused by climate change only. But they also agree that climate change made them more severe and is likely to make them more frequent and longer lasting. "There are a lot of factors that merge into these events, but we know that with climate change and higher temperatures, the wildfire seasons should be getting longer. That's something that we've seen in Australia this year where it started much earlier than usual; in Venice, we know that sea levels will be rising, which means that storm surges will become more severe and more frequent," said Catherine Wenigmann, flood and wildfire expert at German insurer Allianz. This is a risk for the insurance industry, but "any risk is [also] an opportunity for us," said Amar Rahman, global practice leader in risk engineering for natural hazards resilience at Switzerland's Zurich Insurance Group, citing the climate risk advisory service the company is currently implementing with a select number of customers (NE Jul.11'19). Historical records show that the global average land temperature has already increased by about 1°C compared to 1900, and "if you look at the data over the past decades, from the 1950s or 1960s, you'll find that different records are being broken everywhere in terms of extremes, such as hottest or coldest temperature," Rahman told Energy Intelligence. Going forward, "the scientific consensus is that extreme events will increase in frequency, magnitude and, just as importantly, duration." Models, for example, suggest that heat waves will continue to become longer and more frequent, which makes it likely that bushfires will become increasingly severe, Wenigmann said. However, in addition to high temperatures and low humidity, which are linked, "bushfires also need sustained wind speeds, which are local things," said her colleague Markus Stowasser, head of Allianz's catastrophe research and development team (EC Apr.13'18). Changing wind patterns will also impact the renewable energy sector, he noted. An "easy example" is Europe, where average wind speeds are likely to decrease because heating rates are much higher in the Arctic region than in lower latitudes. This will reduce temperature differences between the Arctic and Europe, which fuel winds in the middle latitudes. But local changes for a specific location or wind farm are "very hard to quantify," Stowasser said. Moreover, based on new information, stronger computers and cheaper data from satellites, the consensus is changing every day -- but always in the same pessimistic direction -- which makes it difficult for the industry to keep up with science, Rahman said. Indeed, "very few" of the tools society has, from insurers' catastrophe models to building codes and financial regulations, have incorporated climate change effects "with any degree of certainty" and "we have to use them more carefully," he insisted. "Before, for example, if we built something that we said was going to be here for another 50 years, the design code was a good basis. Now, we're seeing that it is already inadequate for the wind or flood events that we're seeing, and we can only use it as a baseline for a scenario-based approach where loads on our buildings are increased by 10%, 20%, 30% or 40%." A good example of how physical impacts could affect the energy industry is the utilities sector. Rating agency Moody's recently published a report on US utilities, urging them to "maintain some financial cushion to absorb the sudden impact of severe storms and flooding." Energy infrastructure along the US East Coast and Gulf of Mexico will be exposed to increasingly powerful hurricanes and higher storm surge, while extreme rainfall and flooding are expected to become more intense in parts of the Midwest, Southeast and Pacific Northwest, Moody's found. Indeed, US renewable energy insurer GCube recently warned the industry about increasingly frequent "soft" catastrophes such as unseasonal hailstorms and wildfires, which can be as damaging as conventional "hard" catastrophes such as windstorms and floods for their purposes. "Both categories of incident are increasingly erratic, occurring outside of previously identified risk zones and for greater lengths of time, leaving renewables infrastructure at greater risk of damage," according to GCube. Higher temperatures will also reduce the efficiency of power grids while "climate change can also increase financial risk for utilities by contributing to sharp increases or declines in energy demand, usually through shifting temperatures and humidity levels," Moody's said. Philippe Roos, Strasbourg

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