Even if we take extensive action immediately to limit our impact on the environment, climate change cannot be easily stopped. What does this impact mean for the food and agriculture industry and how should insurers prepare for it?
Every year, we see and feel the impact of climate change on ourselves and on our immediate surroundings. Climate change isn’t new news. Over the years many scientists have confirmed the impact humans are having on our environment in numerous scientific studies. One such study by the IPCC (Intergovernmental Panel on Climate Change), cites that the average temperature of the earth was 1.09 degrees Celsius higher between 2011-2022, than preindustrial times, between 1850-1900. All forecasts predict, regardless of actions taken, that the earth’s temperature will continue to rise until at least the middle of this century. This means that even if we take extensive action immediately to limit our impact on the environment, climate change cannot be easily stopped. What does this impact mean for the food and agriculture industry and how should insurers prepare for it?
Preparing for climate change
By the end of the 21st century, we will have to, or rather our children and grandchildren will have to, struggle with temperature increases predicted to be, on average, two degrees Celsius higher than the pre-industrial era – that’s twice as high as today! At the same time, due to heat capacity and inertia, the land will also heat-up until it is approximately one and a half times hotter than the oceans and seas. As the earth’s land mass is predominantly located in the northern hemisphere, this means Europe will acutely feel the rise in temperature. This is going to cause headaches for the food and agriculture industry and their insurers alike.
In addition to rising temperatures, one must not forget other factors, such as the increasing cost of fuels for energy production and the search for greener, but more expensive, solutions to using these resources. When these are considered, the desired goal of reducing the impact of industry on the climate is thrown off balance: Some countries facing rising energy prices are questioning whether it is economically better to continue to overlook the environmental impact of generating energy from traditional, unecological sources to ensure their populations and industries are kept supplied, in lieu of using greener, more expensive solutions to minimise climate change.
Last summer, we saw the effects of climate change, with increasingly hotter summer days and nights, and extreme weather conditions. For holidaymakers, nice weather, and high temperatures are attractive. However, from the perspective of the economy and the impact on society, quite the opposite is true. Here’s why: High temperatures often exceed the optimal conditions for factories’ production equipment, increasing the risk of failure, leading to downtime and the need to reduce production. Offices and private homes using air conditioners put a strain on the power grid which results in increased energy consumption. Also, those industries in which it is necessary to maintain a constant temperature (e.g. cold stores, freezers etc.) incur increased operating costs.
Living things are also not indifferent to high temperatures. animals migrate searching for better conditions, thermophilic species appear in northern countries, and plants’ vegetation is reduced.
Lack of rainfall resulting in drought maybe perceived as a mere annoyance for an ordinary citizen faced with restrictions on watering home gardens or washing vehicles. However, for the food and agriculture industry it can spell disaster. Our rivers suffered greatly last summer, and they have not yet returned to average, safe levels. This is having a massive knock-on effect on the agricultural industry and our economies as a whole. Heat is not a critical phenomenon for plants unless it is long-lasting and accompanied by a lack of rainfall. Unfortunately, last summer’s climatic situation caused prolonged periods of heat, accompanied by periods without rainfall causing agricultural drought, i.e., a state in which the lack of moisture in the soil threatens the vegetation of plants, spelling problems for food production and animal feed. However, it is not just these obvious effects on the agriculture industry that we need to be aware of here. Low water levels also affects the energy sector because it restricts the availability of a coolant, causing limitations in energy production. This in turn impacts agriculture because at high temperatures, the energy industry may activate measures to protect transmission lines leading, for example, to switching off the energy supplied to a plant. This would mean, in the average production plant, that production is temporarily stopped, which would cause financial losses for the business. However, there are some businesses in the food and agriculture industry, especially those connected with livestock, where this scenario could be fatal because a constant energy supply is necessary for ventilation and supplying drinking water to the animals (e.g., poultry farming). If the operation of the plant is directly dependent on energy, and the lack of supply or a change in its parameters causes downtime or damage to the equipment, we are talking about damages that reach thousands of euros.
As if that wasn’t concern enough for the industry, a heatwave is usually accompanied by an equally great wave of fires, which generates large insurance losses regardless of other causes. With very dry soil and litter, it doesn’t take much to start a fire that destroys forests and crops and threatens homes and factories. Very often, such fires cannot be brought under control by local forces, and it is necessary to use the help of other regions or even neighbouring countries.
Higher temperatures also mean a greater risk and frequency of violent weather conditions. Hurricanes, hailstorms, torrential rains, and flash floods are already becoming more and more frequent causes of damage. Their effects on private buildings can often result in irreparable damage or complete destruction.
Can we ensure against soaring temperatures and the risks they bring?
However, whether risks such as lack of energy due to a heatwave can be insured or not, remains to be seen. Currently, this risk is not commonly insured, additionally, the liability of the energy supplier is limited by the occurrence of force majeure. If we consider a phenomenon that could not be prevented as such, then the heat wave and the resulting lack of water in rivers, limiting production, meets these conditions. Whilst we are talking about a risk that is not directly insurable, the solution may be index and parametric insurance. If we take specific weather conditions as a parameter, it seems possible to construct a product that meets the needs of customers. In the world, such solutions are becoming more and more common, but the question is, when will we see such solutions in our market?
In a nutshell, as the food and agricultural industry experiences greater challenges in the face of climate change, so too does the insurance industry, and we predict these will only become more challenging as climate change progresses. The risk profile of individual activities is changing along with climate and environmental changes. In the case of agriculture and crop insurance, we have not had to deal for a long time with the catastrophic extent of damage from the negative effects of overwintering, as in 2012. However, the warming climate, as we have seen, is causing and will continue to cause more summer damage. In the case of industry, the risk of flooding and machine breakdowns is increasing and will continue to do so. Our insurance offer should, and will need to, adapt to these changes to ensure our clients are always fully insured. Watch this space!
Group Practice Leader
Food & Agriculture
T +48 22 39 33 211
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