On the same day as President Obama’s inauguration speech, in which he discussed the evidence of climate change and pledged to take steps to address its effects, Swiss Re released a report outlining potential scenarios as climate change plays out as well as how insurers can help the energy unload some of its risk.
But there are many uncertainties as the expected risks are still unknown.
In an attempt to find out, researchers looked at the total investment needs for various energy sources and then quantified how the risks affect total greenhouse gas abatement costs. According to the report, “this is done by calculating the total capital expenditures for selected energy technologies and putting a price tag on their associated risks, expressed in total expected annual losses.”
Five categories of engineering-related risk affect the energy sector: property risks, liability risks, business interruption, societal externalities and business case risks. Of these, according to the report, only the first three types can be fully diversified away or transferred. These risks relate to physical damage to property caused by natural or man-made catastrophes, liabilities for negligent acts, missed profits due to production downtimes or damage incurred by society at large.
The report concludes that both the investment and the insurance needs of the energy sector will significantly increase, but when they do depends on how things play out. Losses are expected to increase no matter what scenarios play out, and Forrester’s estimate as to when loss exposure will increase enough to demand insurance is by 2030.
By 2030, annual expected losses will be at least 25 percent more than today, according to the report, putting the figure at $25.6 billion—and in the “greenest” scenario outlined by Forrester, the number would more than double to $41.7 billion.
