Japanese insurers battle climate change cost estimates

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TOKYO – As the world tries to price the cost of climate change, Japan’s second-largest non-life insurer MS&AD predicts that the potential increase in claims payments in 2050 will be between 5% and 50% from current levels .

Sompo Holdings, the third largest non-life insurer, also plans to announce a similar estimate in August, but with many reservations, officials said.

Others, including industry leader Tokio Marine & Nichido Fire Insurance, are even reluctant to produce estimates, citing a lack of data.

Read more: Explaining climate change and financial disclosure for insurers

“We know that our analysis is not perfect,” said Yasumasa Kanie, head of the sustainability section of MS&AD Insurance.

“But there may never be a correct answer. It’s better than nothing.”

The wide range produced by MS&AD illustrates the difficulty of assessing climate costs and highlights the challenge financial institutions face in responding to investor pressure for more disclosure.

Calculating climate costs is no easy task, even for Japanese insurers, armed with sophisticated models to predict the course and intensity of typhoons, and the damage they could cause.

“We have experience in estimating payments for insurance sold in any given year,” said Hiroo Shimada, deputy general manager of the sustainability division of Tokio Marine.

“But doing an unclear scenario analysis of how the climate might change in 50 years, and how that might affect the number of typhoons that hit Japan, is another story.”

Stress tests

Japanese regulators are still learning how to set disclosure rules, lagging behind their counterparts in countries like Britain and France which have already announced their intention to conduct stress tests incorporating climate risks.

National financial institutions were thus allowed to slow down. But that is changing as Japan joined its Group of Seven counterparts this month in backing measures to force banks and businesses to disclose their exposure to climate risks.

Among the world’s most disaster-prone countries, Japan is already experiencing an upsurge in heavy rains, typhoons and flooding, which the government attributes in part to climate change.

Total flood damage hit a record 2.2 trillion yen ($ 19.8 billion) in 2019. Unprecedented torrential rains in southern Japan last July inundated 13,000 hectares of land. costing non-life insurers 106 billion yen in payments. (Click on here to see an interactive Reuters chart of flood damage in Japan.)

The government estimates that average temperatures in Japan will rise to 4.5 degrees Celsius by the end of this century, which could double or quadruple the number of floods.

Bank of Japan Governor Haruhiko Kuroda warned that climate change could have an “extremely large impact” on the economy, when he announced the bank’s plan last week to increase funding for the economy. fight against climate change.

As the need for disclosure appears imminent, various factors are making insurers, including those in Europe and the United States, reluctant to do so.

Among them is the difficulty of modeling the impact of rising temperatures on cash flows over such a long period of time, as well as the lack of uniform and comparable global rules on which assumptions they can base their projections on. (An interactive graph from Reuters on the profits or losses on basic fire insurance of non-life insurers can be viewed here.)

Global standards

Policymakers have urged companies to use the recommendations made in 2017 by the Climate-Related Financial Disclosures (TCFD) Task Force. But the TCFD itself has warned that more tools, data and methods need to be developed for climate-related scenario analysis to work for a wider range of industries.

Setting global standards could prove to be a complex and controversial process that could take years, as climate change affects countries in different ways, analysts say.

Europe has suffered from the heat and drought, while Australia and some US states like California have been hit by wildfires.

In Japan, floods caused by typhoons and heavy rains account for about 70% of all natural disasters, and that is part of why MS&AD’s analysis is based on the impact of typhoons.

“I am really surprised that MS&AD has decided to disclose its analysis,” said Eiji Kubo, director of S&P Global Ratings Japan.

“Even now, one or two typhoons could sharply increase losses to the scale of 100 billion yen,” he said. “When it’s so difficult to predict costs several years from now, what’s the point of trying to project for 2030 or 2050? “

($ 1 = 110.8700 yen)

(Reporting by Leika Kihara and Takahiko Wada; additional reporting by Daniel Leussink; editing by Muralikumar Anantharaman)

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