Global Climate Change and Effect on Typhoon, Flood and Drought Risks in Asia Graham R Cook 8-October-2014
Climate Change 2
Climate Change - Why does it matter to Insurance company? It affects profitability It can have a significant impact on the balance sheet It affects Insurability of certain exposure It affects risk modelling and pricing Product development 3
Contents 1. Climate Change Primer 2. IPCC Assessments 3. Effects on Tropical Cyclones 4. Floods and Droughts 5. Summary 4
Climate Change Primer Most climate scientists agree that the main cause of global warming is anthropogenic Warming resulting from trapping of heat in the atmosphere (Greenhouse effect). Certain gases block heat from escaping. Long lived gases remain semi permanently in the atmosphere 5
Climate Change Primer cont. According to WMO, over the last 100 years the Earth s average temperature has increased from about 15.5 o C to 16.2 o C. Attributable to different greenhouse gases: CO 2 contributed about 60% of total Methane about 25% Balance from Nitrous Oxide and CFC s Average warming was 0.02 o C/year for 1970-2000 but from 1998-2012 has been a stagnation with estimates averaging around 0.0053 o C/year 6
Climate Change Primer cont. Possible reasons for discrepancy posited by Storch et al., (2013) are: Climate models underestimate internal natural climate variability Climate models fail to include important external forcing processes in addition to the anthropogenic forcing Climate model sensitivities to external anthropogenic forcing is too high Possible reasons from IPCC AR5: Cooling due to internal variability. Most familiar are El Nino- Southern Oscillation (ENSO), Atlantic Multi-decadal Oscillation (AMO) and Pacific Decadal Oscillation (PDO) Cooling due to reduced trend in radiative forcing. Primarily due to volcanic activity and the downward phase of the current solar cycle. 7
Climate Change Primer cont. A recent paper in the journal Science suggests that the apparent slowdown in surface warming is due to the heat being trapped in the deep Atlantic and Southern Ocean. The researchers looked at ocean observations and found that more heat began to sink around 1999 when the temperature increase started to slow down. Also, they found that it wasn t the Pacific, that earlier studies had indicated, as the heat sink. 8
Temperature Anormaly (100x o C) Climate Change Primer cont. 100 80 60 Temperature Anomlay - DJF Temperature Anomaly - JJA Temperature Anomaly - Year Temperature Anomaly - MAM Temperature Anomaly - SON 40 20 0-20 -40-60 -80 1880 1900 1920 1940 1960 1980 2000 Source: NASA GISS
Main Greenhouse Gases Water Vapor Most abundant greenhouse gas but acts as feedback mechanism. Do clouds make the earth warmer or cooler? 1 0
Main Greenhouse Gases CO 2 Very important component of the atmosphere. Naturally present in atmosphere due to carbon cycle. Humans have increased the atmospheric concentration by deforestation, land use changes, and burning fossil fuels. 1 1
Main Greenhouse Gases - Methane Methane. Hydrocarbon gas produced through natural and human activities. Includes decomposition of waste in landfills, agriculture, ruminant digestion and manure management associated with livestock. 1 2
Why the Earth is Farting? (CNN) Recently three craters, one of which is below, discovered in Siberian permafrost. Giant sinkhole in Siberia caused by methane released as permafrost melted. 1 3
Main Greenhouse Gases Nitrous Oxide A powerful greenhouse gas produced by use of commercial and organic fertilizers, fossil fuel combustion, nitric acid production, and biomass burning. Plays an important role in the destruction of the ozone layer which protects from the harmful UV rays of the sun. 1 4
Main Greenhouse Gases CFC s Synthetic compounds entirely industrial origin. Now largely regulated in production and release due to their contribution to the destruction of the ozone layer. CFC s were replaced by HCFCs. 1 5
Climate Change Effects From IPCC Assessments Major conclusions for Asia include: Warming trends include higher extremes are strongest over continental interiors of Asia, and warming from 1979 onwards was strongest over China winter, and northern and eastern Asia in spring and autumn From 1900 to 2005 precipitation increased significantly in northern and central Asia but declined in parts of southern Asia Future climate change is likely to affect water resource scarcity with enhanced climate variability and more melting of glaciers Increased risk of extinction for many plant and animal species in Asia is likely Projected sea-level rise is very likely to result in significant losses of coastal ecosystems 1 6
Climate Change Effects From IPCC Assessments cont. There will be regional differences within Asia in impacts of climate change on food production Due to projected sea-level rise, millions of people along the coasts of South and Southeast Asia will likely be at risk from flooding It is likely that climate change will impinge on sustainable development of most developing countries of Asia as it compounds pressure on natural resources and the environment Vulnerability of industry, infrastructure, settlements and society to climate change are generally greater in certain high-risk locations, particularly coastal and riverine areas 1 7
Climate Change Effects From IPCC Assessments cont. Major conclusions for Australasia include: Australia experienced warming and changed rainfall patterns with sea-level rise across the region Greater frequency and intensity of drought and heat-waves, reduced seasonal snow cover and glacial retreat Changes in extreme events including more intense and frequent heat waves, fire, floods, storm surges, and droughts but less frequent frost and snow. Vulnerability would increase mainly due to increase in extreme events 1 8
Sectors in Which Climate Change Should be Considered According to Hallegatte (2009) the following sectors should have already taken into account climate change: Water infrastructure (dams, reservoirs, etc.) Land-use planning (flood plain, or coastal areas) Coastline and flood defences (dikes, sea-walls, etc.) Building and Housing (structural systems, windows, etc.) Transportation infrastructure (ports, bridges, etc.) Urbanism (urban density, parks, etc.) Energy production (nuclear plant cooling system) 1 9
Tropical Cyclones Many factors influence tropical cyclone behavior but three factors must be present for them to intensify: warm ocean temperatures exceeding 26 o C, low vertical wind shear, and high humidity. 2 0
Effect of Climate Change on Cyclones Prevailing scientific opinion as given in 2012 IPCC report is that tropical storms are likely to increase in intensity and rainfall but stay constant or even decrease in frequency with a warming climate: Fewer storms globally (no change to -34%) with more uncertainty in individual basins Increase in average hurricane wind speeds globally (+2 to 11%) though not in all basins More frequent intense storms (>50% chance will increase significantly in some basins) Higher rainfall rates in hurricanes (+20% within 100 km of storm) Sea level rise to exacerbate storm surge impacts even assuming storms don t change due to coastal development 2 1
Effect of Climate Change on Cyclones Researchers also looked at climate change on ENSO. ENSO leads to higher sea surface temperatures in Pacific and almost a continuous El Niño. Higher sea surface temperature alone lead to more severe storms but they cause other weather patterns that might mitigate storm formation. We observed two storms impacting Hawaii in August within the same week which is very rare and suggested due to the upcoming El Niño Likely change in cyclone track patterns with a pole-ward shift. 2 2
Current Tropical Cyclone Activity Around 90 tropical cyclones form around the various basins each year with a variability of around 9 per year. This has been relatively stable since the start of the satellite era. Of the 90 approximately 50 are classified as Cat 1-5 (SS) and around 16 are classified Cat 4-5 (SS) North-Western Pacific Basin has on average 27 tropical storms per year and 17 become hurricanes North Indian Basin has on average 5 tropical storms and 2 become hurricanes South-West Indian Basin has on average 16 tropical storms and 8 become hurricanes South-West Pacific Basin has on average 11 tropical storms and 5 become hurricanes 2 3
Australia Storm Tracks Since 1980 2 4
China Storm Tracks Since 1980 2 5
Japan Storm Tracks Since 1980 2 6
Modelling Approach The standard industry numbers were taken from one of the aggregate Cat models for the three different countries. The scenarios simulated were: Base Case Model severities and frequencies Based on historical Overall 20% increase in frequency and 20% more Cat 3-5 40% more Cat 3-5 Overall 40% increase in frequency and 20% more Cat 3-5 40% more Cat 3-5 For each simulation, 100,000 years of possible losses were sampled using an in-house tool Overall frequency increase was modelled by just adopting a Poisson mean (λ) equal to the percentage increase from the base case Increase of more severe storms (SS Cat 3-5) were determined by adding more severe storms randomly to the dataset. 2 7
Coastal Populations UN Report As of 1998 over half of the earth s population, around 3.2 billion people, lives and works in a coastal strip just 200 km wide, while around 4 billion are within 400 km of a coast. In general, except for India, the majority of Asia s population is coastal or near coastal China Of China s population close to 60% live in 12 coastal communities, along the Yangtze River valley, and in two coastal municipalities Shanghai and Tianjin. In 1997 Japans total population was around 126 million. Of this nearly 80% or 100 million are considered coastal. 77% live in urban areas along or near the coast Australia s population is around 22 million. Australia s coastal population has been growing faster than the population of the rest of Australia and is expected to increase by another one million over the next 15 years 2 8
Shanghai Change in 26 Years Pudong, Shanghai, 2013 1987 http://wuwei1101.popo.blog.163.com/blog/static/48670867201375115058 28/
Population Density Within and Outside a 10m Low Elevation Coastal Zone 3 0
Population Density - Australia 3 1
Results As previously mentioned the results are based on using output from one of the catastrophe models supplied by third-party vendors. The following slide shows the expected increase in losses with increasing overall frequency and increasing severe storms The effect of increasing intensity storms doesn t necessarily mean that expected losses are lower. The less intense storms usually have a larger radius and affect a much larger area for a longer period leading to potentially higher losses. Also, there are many factors that haven t been taken into account that could affect the losses. 3 2
Results Expected Change in Losses 3 3 Standard 20% Increase in Overall Frequency 40% Increase in Overall Frequency Country Base Case 3-5 Severities Increase 3-5 Severities Increase 20% 40% 20% 40% Australia Expected 100% 133% 167% 154% 180% 1 in 100 100% 122% 145% 129% 150% 1 in 250 100% 116% 129% 121% 135% China Expected 100% 130% 141% 152% 165% 1 in 100 100% 131% 144% 144% 159% 1 in 250 100% 135% 141% 147% 156% Japan Expected 100% 135% 148% 158% 174% 1 in 100 100% 122% 130% 132% 141% 1 in 250 100% 118% 127% 127% 139%
Tropical Cyclone Summary This tropical cyclone study is just an indicator of possible losses due to climate change based on an increase in both severity and frequency. Losses can increase significantly with an increase of 40% of Cat 3-5 storms in the future (expected losses almost doubling), but, there is high variability in the actual losses. With climate change there might be a change in the path of storms and they might start to impact the southern parts of Australia or northern sections of China and Japan more frequently. This could lead to more significant losses as China and Australia populations will be higher in these regions. The major increase in losses will be due to the increase in building stock in exposed areas. China will see the largest increase due to the increased building along the coast plus the increase in penetration rate of insurance. 3 4 There are so many other factors that will likely lead to even more significant increase in losses including, more precipitation, higher coastal surge, change in tracks to more vulnerable regions, etc.
Climate Change Floods and Droughts Climate change is predicted to cause more intense and frequent floods and droughts in Southeast Asia Will affect the world s rice bowl and millions of people. Three of the world s five most populated cities (Tokyo, Delhi and Shanghai) are located in areas with high risk of floods Largest insured flood loss occurred in Thailand in 2011 Glacier melt in Himalayas projected to increase flooding and this will be followed by decreased flow as glaciers recede According to an article in Nature, based on a combination of rising seas, sinking land, and growing coastal development, global flood damages could reach well over $1trillion every year by 2050 3 5
Cities Highest Annual Flood Costs 2050 3 6
Pakistan Floods 2010 3 7
Pakistan Floods 2010 3 8
Pakistan Floods 2010 3 9
Thailand Floods 4 0
Pakistan-India Floods 2014 4 1
Pakistan-India Floods 2014 4 2
Indian Flooding 2013 4 3
Indian Flooding 2013 4 4
Thailand Rice Areas 4 5
Thai Rivers 4 6
Chao Phraya Drainage Area 4 7
Thailand Population 4 8
Thai Floods 2005 4 9
Thai Floods 2006 5 0
Thai Floods 2007 5 1
Thai Floods 2008 5 2
Thai Floods 2009 5 3
Thai Floods 2010 5 4
Thai Floods 2011 5 5
Thai Floods 2012 5 6
Thai Floods 2013 5 7
Climate Change Crops and Livestock Too much water and too little water have always been the natural curse of agriculture (FAO) Little data available for observed impacts of climate change on crops. According to IPCC AR4, climate change was projected to lead to a decrease in crop yields. New research indicates that there will also be gains in yields for certain regions and crops. Therefore, AR5 indicates large variability depending on the specific region and crop Under climate change there will be more drought occurrences in China leading to drought induced water shortages affecting agriculture 5 8
Drought - Livestock 5 9
Drought - Crops 6 0
Climate Change India Crop Yields in Drought Drought data was obtained from the Indian Meteorological Department Crop yield data obtained from the Food and Agriculture Organization of the United Nations Five main crops considered, wheat, rice, sugar cane, pulses, and oilseeds. Wheat is least vulnerable to drought with rice being very vulnerable to drought Based on yield data from 1961 the average and standard deviation for yield change from year to year for non drought years was: Wheat 3% and 7%, Rice - 4% and 8%, Sugar Cane 2% and 6%, Pulses 6% and 34%, and Oilseeds 4% and 14% Based on the same yield data, the average and standard deviation for yield change from year to year for drought years was: Wheat 3% and 10%, Rice - -7% and 8%, Sugar Cane -3% and 5%, Pulses -4% and 9%, and Oilseeds -9% and 14% 6 1
Climate Change Other Effects - Health The human population is sensitive to changes in weather and other effects from climate change. According to IPCC AR5 the major changes in health due to climate change are: Greater risk of injury, disease, and death due to more intense heatwaves and fires Increased risk of malnutrition due to decreased food production Increased risk of food- and water-borne diseases and vector-borne diseases Moderate decrease in cold related mortality due to fewer cold extremes According to WHO, Dengue fever is the most rapidly spreading mosquito-borne disease with around 400 million dengue infections worldwide, with one quarter showing symptoms and around three quarters of exposed people in APAC region. An increase of heat waves and droughts will lead to more wildfires which will increase the number of acute air pollution cases 6 2
Summary There still are many unanswered questions as to how climate change will affect the insurance industry but if it continues as predicted then: Will likely see an increase in losses due to tropical storms, An increase in negative health effects An increase in floods and droughts which will generally impact agriculture negatively All is not lost though. There are measures that can be taken to adapt and mitigate the effects of climate change. Water expand rainwater harvesting, water storage and conservation techniques, water re-use, desalination, etc. Agriculture Adjustment of planting dates and crop variety, crop relocation, improved land management Infrastructure Relocation, sea-walls and storm surge barriers, creation of buffers, etc. Human health Improve climate sensitive disease surveillance and control, improve sanitation, etc. 6 3
According to a CERES Report, Insurers and Reinsurers should: Summary Incorporate increased risk exposure analyses to account for emerging extreme weather patterns and implement risk management practices to provide appropriate rates and reserves Support research on national and local forecasting of future weather patterns Collaborate with climate scientists to develop new modeling capabilities Lend expertise to land use planners and other organizations in critically exposed markets. Develop underwriting guidelines and rate plans that reward insureds that increase resiliency (e.g., storm-resistant buildings). Favor new products and services that promote clean and efficient uses of energy. 6 4
Summary According to a CERES Report, Insurance Sector Investors / Rating Agencies should: Encourage insurers to integrate climate change management into their risk management practices Judge the quality of an insurer s approach to climate change risks and opportunities Regulators should: Demand increased climate risk disclosure, build climate risk considerations into their financial oversight process, create more resources to help insurers analyze and respond to climate-related risks and opportunities, and incentivize insurers and consumers to increase the resiliency of homes and businesses, and reduce the release of greenhouse gases 6 5