Between 2016 and 2021, insurance companies reported 3622 instances of natural disasters to the Financial Supervision Commission, including floods, storms, droughts or tornadoes. Such events are set to become increasingly frequent. For example, in 2021, insurers registered twice as many occurrences of heavy rainfall and hurricanes compared to 5 years earlier, and the total payout was three times higher. In the first quarter of 2022 alone, nearly 205 thousand casualties of natural disasters were reported, amounting to a value of 691 million złoty. Therefore, managing climate risk is becoming a pressing concern. The second edition of the “Climate of Growing Losses. The Role of Insurance in Climate Protection and Energy Transition” report, prepared by EY and the Polish Chamber of Insurance (PIU), discusses the biggest risks and resulting financial damages.
Over the past four decades, the world has witnessed not only an increase in the number of extreme events but also a rise in the magnitude of financial losses incurred as a result of these disasters. The annual average in the period of 1981-1990 was nearly 41 billion USD set aside for damage coverage. In the last decade (2012-2021), the figure was almost five times higher – over 193 billion USD. Importantly, over the past 40 years, the share of insured losses in the total losses caused by natural disasters was 39.3% on average. This means that the majority of damages are uninsured, resulting in slower economic recovery in regions affected by natural disasters, especially in third world countries.
Having a higher percentage of insured damages is not only a safeguard against potential unexpected events for the insured themselves but also contributes to the acceleration of economic recovery or limiting the period of decreased production. In the work titled “Climate change, catastrophes and the macroeconomic benefits of insurance”, prepared by scientists from the European Insurance and Occupational Pensions Authority (EIOPA) and the European Central Bank (EBC), attempts were made to examine the impact of natural disasters on GDP based on the magnitude of damages and the share of insured losses in the damages. The conducted analysis revealed that a higher proportion of insured losses in the damages allows for quicker economic recovery for the affected region. This is particularly evident in extreme cases when the disaster severely hits the region’s economy.
More natural disasters in Poland
The last 20 years were the warmest period in our country since the mid-20th century, with 2023 being the hottest year in recorded history. Shorter cold periods, less snow cover, and changes in the occurrence of thermal seasons result in an earlier onset of the growing season, often interrupted by sudden cooling and intense rainfall along with concurrent hail and strong wind. Such unstable conditions, which are the most visible manifestation of climate change, led to a total payout of 1.539 billion złoty in crop insurance from 2018 to 2021.
Long-lasting droughts interrupted by heavy rainfalls and hurricanes are becoming typical weather phenomena for Poland. Insurance company data from recent years show that torrential rains and floods have the largest share among the categories of natural disasters occurring in a given year. For instance, in 2021, there were 62 occurrences caused by destructive rains, storms and hurricanes, with damage collectively worth 970 million złoty. In comparison, 5 years earlier, these events numbered 30, with damages reaching 289 million złoty. An apparent upward trend both in the number of natural disasters and their destructive potential is therefore visible.
Natural disasters will occur more frequently, and their effects will be more severe. Not only residential buildings and agricultural structures are at risk, but also the infrastructure at large. A broken bridge or disruption in internet access can hinder firms’ functioning and contract fulfillment for several days, or even weeks, resulting in severe financial losses. In the long run, this could even lead to staff reductions, if the entrepreneur feels a deterioration in their financial situation. Consequently, short-term but violent climatic events have a significant and often long-term negative impact on economic activity – states Marcin Sadek, EY Partner and leader of advisory for the insurance sector at EY Poland.
Intensity of rainfall and river, flash or urban flooding
In the last three decades, Poland was hit by two major river floods: in 1997, the losses amounted to 4.5 billion złoty, and in 2010 to 2.5 billion złoty. Crucially, in the near future, the nature of these violent weather phenomena is expected to change. Experts indicate that the currently anticipated increase in the intensity of heavy atmospheric rainfall, which result in flash or urban floods, poses a greater and more realistic threat to Poland. In 2021, these incidents occurred in Germany, causing damages estimated at 33-54 billion USD. Similar events were also noted in Poland – in the same year, Poznań recorded 64 liters of water per square meter in just 30 minutes, which corresponds to a monthly average rainfall.
In the case of such phenomena, prevention and investment in blue-green infrastructure are crucial. Between 2017 and 2019, as part of the “Let’s Feel the Climate” project, the Ministry of the Environment prepared climate change adaptation plans for the 44 largest urban centers in Poland. These plans place great emphasis on more efficient water infiltration through the ground and increased retention of water reservoirs.
A model anti-flood investment is the construction of the Racibórz reservoir, which protects 2.5 million people from flooding. It was put into use in June 2020, and the entire project consumed almost 2 billion złoty. EY’s report shows that the construction of the reservoir would have reduced total insured losses from the 1997 and 2010 floods by over one billion złoty. For the “Flood of the Millennium” losses would have been lower by 19%, while for the disaster occurring over 10 years ago- by 11%.
Increasing Frequency of Droughts
For several years, Poland has been facing a hydrological drought, characterized by a long-term decrease in surface water resources of rivers and lakes. This can result in land subsidence or landslides, posing a significant threat to building structures. Another concerning phenomenon is the increasingly prolonged meteorological drought indicative of low rainfall, especially during the plant growing period. It poses a particular threat to agriculture, leading to lower yields, and consequently – higher prices for end consumers. For example, the drought persisting in Poland in 2019 reduced yields by approximately 20%. A truly catastrophic scenario could occur if conditions currently observed during the hydrological drought coincide with extremely severe meteorological droughts, similar to those that occurred in the 1980s and 1990s.
Preventing hydrological drought requires a shift towards deconcreting cities, which will facilitate free drain of rain and thawing water deep into the ground. It’s also important to increase the water retention rate. In 2021, it amounted to merely 7% in Poland, whereas the desired water collection index is twice as high (15%). A significant step was the introduction of an irrigation program in agriculture by the MRiRW which involved investments in modernizing existing irrigation systems or creating new ones. Moreover, the “Development Program for Retention for 2021–2027 with a perspective for 2030” and a plan to counteract the effects of drought have been developed.
In addition to implementing temporary changes and programs, it is advised to secure oneself against unpredictable weather phenomena by purchasing insurance. It is crucial support not only for the insured person but also for the country’s economy. If a major natural disaster occurs and the insurance coefficient is high, the insurer covers the losses, allowing faster economic recovery. Insurance is a vital element in combating the effects of climate change. The role of the state is also crucial, as projects aimed at combating drought or preventing floods require significant expenditure. Preventive actions related to the construction of infrastructure minimizing damages caused by elements, undertaken by local self-governments, are equally important – says Hanna Ulańska, EY Partner in the Risk Consulting department.
