Japanese insurers are struggling to estimate the cost of climate change

TOKYO (Reuters) – As the world tries to price in the cost of climate change, Japan’s second largest property insurer MS&AD is forecasting a potential increase in claims payments of between 5 and 50% in 2050 from current levels.

Sompo Holdings, the third largest property insurer, also plans to release a similar estimate in August, but with many reservations, officials say.

Others, including industry leaders Tokio Marine and Nichido Fire Insurance, are reluctant to make estimates due to a lack of data.

“We know our analysis is not perfect,” said Yasumasa Kanie, sustainability manager at MS&AD Insurance.

“But there can never be a right answer. It’s better than nothing.”

MS&AD’s broad range illustrates the difficulty of pricing climate change costs and underscores the challenge facing financial institutions to meet investor pressures for more disclosure.

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

“We have experience estimating payments for insurance policies that were sold in a given year,” said Hiroo Shimada, executive director of Tokyo Marine’s sustainability division.

“But doing scenario analysis without clarity about how the climate might change in 50 years and how that might affect the number of typhoons that hit Japan is a different story.”

STRESS TESTS

Japanese regulators are still learning their way about setting disclosure rules and are lagging behind their counterparts in countries like the UK and France, which have already announced plans to conduct stress tests involving climate risks.

So domestic financial institutions were allowed to go slowly. But that’s changing as Japan joined its Group of Seven this month to support measures to force banks and corporations to disclose their exposure to climate risk.

As one of the most disaster prone countries in the world, Japan is already experiencing an increase in torrential rain, typhoons and floods, some of which the government attributes to climate change.

Total flood damage reached a record 2.2 trillion yen ($ 19.8 billion) in 2019. An unprecedented torrential rain in southern Japan last July flooded 13,000 acres and cost property insurers 106 billion yen in payments.

(Graphic: The flood damage in Japan has increased sharply in recent years,)

(Click here for an interactive graphic on the flood damage in Japan: tmsnrt.rs/3j1z3fy)

The government estimates that average temperatures in Japan will rise by as much as 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 to combat climate change.

While the need for disclosure is imminent, insurers, including those in Europe and the United States, are suspicious of a number of factors.

These include the difficulty of modeling the effects of rising temperatures on cash flows over such a long period of time, as well as the lack of uniform, comparable global rules on which to base their forecasts.

(Graphic: the bottom line is that extreme weather harms insurers)

(Click here for an interactive graph on core gains or losses for non-life insurers: tmsnrt.rs/2TWXSyT)

GLOBAL STANDARDS

Policy makers have urged companies to use the 2017 recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). However, the TCFD itself warned that more tools, data, and methods need to be developed in order 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 suffered from heat and drought, while Australia and some US states such as California were hit by forest fires.

In Japan, flooding caused by typhoons and heavy rainfall accounts for around 70% of all natural disasters. This is in part 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.

“A typhoon or two could already push losses to the order of 100 billion yen,” he said. “If it is so difficult to predict costs several years from now, what is the point in making forecasts for 2030 or 2050?”

($ 1 = 110.8700 yen)