Climate Change Risk Assessment: Economic and Political Effects

Credit and Political Risk: The Effect of Climate Change

This series explores the complex and shifting risks that credit and political risk (CPR) underwriters need to consider. First, here is a look at how the paths of climate volatility and CPR are beginning to cross.

With scientists predicting more severe natural disaster events, the potential impacts are becoming a growing fact for underwriters as they assess credit and political risk in emerging markets.

When a natural catastrophe hits the developed world, it will not necessarily have a material impact on a country’s wider economy, political stability or credit rating. But in less-resilient regions, the economic and political effects of natural disasters can be far reaching.

Hurricane Irma: a tale of two economies

In 2017, Hurricane Irma cut a devastating path across the Caribbean before turning its attentions towards Florida, and the economic effect vastly differed between the regions.

Sources: NBC, The Balance.com, The Conversation.com, icfdn.org, tradingeconomics.com

The opportunity for underwriters

The outlook for the most vulnerable regions can look bleak, but a growing awareness of the global effects of climate change can present opportunities for underwriters.

“Improving our understanding of climate effects can help us to support our clients in markets where there is a heightened perception of natural catastrophe risks affecting the economy or political situation,” says Chris Quaey, an ArgoGlobal CPR underwriter.

“We see opportunities to take attractive, well-priced transactions in strong emerging markets as clients look to hedge their investments and assets,” he says. “As lenders and investors increasingly factor environmental and climate change threats into their own risk assessments, we’re starting to see good risks, which traditionally may not have been insured in our market.”

Climate change risk assessment of the political landscape

Argo provides policies that protect clients’ investments against unexpected political scenarios, including coups, war or terrorism. Recognising how severe weather events, such as droughts or flooding, could negatively affect political stability is becoming an essential aspect of overall risk assessment.

“Water insecurity is becoming a big issue in Northeast Africa and the Middle East,” Quaey says. “Droughts can increase food prices, displace populations and cause political unrest whilst ways in which neighbouring countries exploit regional water sources can severely affect relationships, ultimately increasing the threat of conflict.”

The future for less-developed countries

Underwriters should assess a government’s attitude toward development. As Quaey says, “An emerging economy that is using unsustainable levels of debt as a means to develop or investing in large so-called ‘vanity projects’ will raise alarm bells.”

In vulnerable regions, nations that focus on investments to combat climate threats and improve the resilience of their economies to survive severe weather scenarios will ultimately benefit the economy in the long term.

Over time, those unwilling or unable to adapt to the negative effects of climate change could see it become harder to attract investors and more expensive to borrow.