U.S. electricity system outages caused by natural disasters drive economic losses of up to $55 billion annually, and these figures are set to grow as climate change causes more extreme weather events, spurring increased demand for innovative risk mitigation and transfer solutions, according to a report recently published by reinsurance giant, Swiss Re.
The report – authored by students of the Johns Hopkins University School of Advanced International Studies (SAIS) – gives insight into the increasing pressure on the U.S.’ already ageing infrastructure as a changing climate worsens utilities’ risk exposure and the consequences for the U.S. economy become more severe.
Closing financial gaps from natural disasters through innovative financing mechanisms remains a frontier area, however, some states have been leading the way to solution seeking.
Most notably, the report found, the Pacific Northwestern states have shown leadership in proactively addressing climate risks, seeking out collaboration between federal, state and local governments, utilities, and the insurance industry, to reassess resilience and sustainability of electricity infrastructure.
Risk strategies combine innovations in electric grid infrastructure, energy generation, financial mechanisms, and policy changes; and on the finance side, insurance, reinsurance, and risk transfer pools are increasingly the main risk reduction strategies.
Policy improvements may include new insurance laws, building codes, and improved regional and intergovernmental coordination and information exchange.
For the re/insurance industry, this means a trail is being blazed that could lead to large-scale uptake of coverage. The report highlighted an encouraging tendency for stakeholders to increasingly view parametric insurance and catastrophe bonds as an integral part of financial mechanisms, within a comprehensive risk management package.
To help prevent and cushion against growing economic losses from electric distribution infrastructure exposures to climate risk, the report said understanding how the different stakeholders bear the financial risks “is essential to identifying the financial gaps for future mitigation strategies.”
Improved public/private sector collaboration is key to alleviating the burden of economic and social losses from electric grid outages or other such damage to infrastructure, and re/insurers can take steps in this direction through upscaling efforts to raise awareness of the cost of climate change risks to infrastructure, while being proactive in creating and promoting cost-efficient, tailor-made cover.
The report highlighted parametric insurance, which makes payments based on a pre-determined triggering event such as wind speeds, as the most probable solution. This is because it enables policyholders to tailor coverage to their specific needs and enables fast payouts that can speed up rates of post-disaster recovery and thus prevent social and economic losses snowballing.
Previous studies have shown that every one dollar invested in insurance saves up to four times as much in economic losses – when it comes to risk, and particularly where infrastructure is involved, an ounce of prevention really is worth a pound of cure.
The impact of increasing severe weather events on infrastructure and the knock-on cost to the U.S. economy, is an area that’s previously often been overlooked and underestimated.
However, perspectives are shifting, with Pacific Northwestern states leading the way into innovative risk transfer solutions that are increasingly turning to re/insurance to protect states and individuals from the financial burden of climate induced infrastructure failure – potentially paving the way for vast market demand for tailor-made U.S. infrastructure re/insurance solutions.
