Francesco Masci: A risk management driven culture and the prevention of damages in the pathway towards sustainability

To begin with, last year figures paint a quite complex picture, which give the flavour of the issues we are facing, as climate risk is a certainty, not a probability. As a matter of fact, according to recent reports, the total number of global natural disasters in 2023 was just shy of 400, resulting in an overall amount of economic losses in the region of $380bn, 22% higher than the long-term average and in excess of $300bn for eight consecutive years, driven by considerable earthquakes and severe convective storms in the United States and Europe.

In addition, global insured losses from natural disasters in 2023 are estimated at $118 billion, up by 31% against the long-term average, and in excess of $100bn for the fourth year in a row. As a result, only about 31% of global economic losses were covered by private or public insurance, which represents a sizeable decrease compared to the previous year, when more than 42% of total losses were covered and the protection gap hit a low.

The reality is that many of the significant NatCat and extreme weather events across the world generated significant uninsured damage, and it goes without saying that these costs had to be covered by local governments, and in my opinion this is a quite painful concealed social iniquity, as the State secures the needed funds through the income tax and the corporate income tax, therefore all the citizens and the businesses – even those who do not suffer any damage – contribute to the reconstruction works.

On top of that, a risk management driven culture aimed to stave off damages remains a catalyst within the business strategies, due to the fact that it brings awareness inside the companies about the rising frequency and severity of certain risks. With regard to the latter, there is little doubt that insurance companies play a pivotal role not only in terms of claims’ handling, but also with respect to adoption of carefully crafted loss prevention measures.

It is glaringly evident that we’re observing a shift in the paradigm of the fallout in terms of damages caused by extreme weather events, and the experience observed in the Italian market can add more colour to this topic: as a matter of fact, heavy rain or hail which were once classified as so-called secondary perils embedding a lower risk, can now lead to damages which can be likened to those generated by a primary peril such as the earthquake.  Yet, a significant protection gap is detected in most of the Italian SMEs with regard to the natural disasters, which on the one hand reveals to which extent the risk management culture is upstaged, and on the other it is at odds with the sustainability goals set by EIOPA which, amongst other things, enhances and rewards the adaptation to climate change of the businesses in terms of lower tariff rates and better terms and conditions. There is little doubt that, such a protection gap is also driven by an inadequate risk management culture and the absence of a risk manager in most of the Italian companies. Regarding this issue, the insurance companies can advise the companies and contribute to the strengthening of the risk mitigation measures aimed at heading off the risk of damages, therefore triggering a virtuous cycle which leads to a lower claims’ frequency and, as a result, to a decline in the business interruptions and economic losses and to an uptick in the productivity.

Last but not least, the so-called ADA project (Adaptation in agriculture), funded by the EU, realized by Unipol Group jointly with several public and private institutions, and aimed to increase the agricultural sector’s resilience to climate change, represents a benchmarking of the public-private partnership. In a nutshell, this is a tool being developed using algorithms, which showcases the current and future risks to which the user is exposed, as well as any possible action that can be designed, rolled-out and implemented to address them and contain the risk exposures of farmers and Producer Organisations. All in all, climate change can be tackled through a public-private partnership with the insurance sector playing a key role in identifying the most appropriate measures and adaptation tools, sharing the data and the knowledge and driving the public sector policies.

Text published in the special edition of NIN magazine – KBF Review 2024.