Working Group II: Impacts, Adaptation and Vulnerability

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8.7. Future Challenges and Research Needs

This assessment reviews our improved knowledge since the SAR. However, it also identifies many areas in which greater understanding is still needed and suggests several challenges for the research community. These challenges can be summarized as follows.

Improve the transfer of knowledge from the scientific community studying climate change and weather forecasting to the financial services community. There clearly is a need for better understanding of how extreme weather events that are important to financial service firms could be affected by climate change. New knowledge should be communicated to the financial community and society for practical use. There is a specific need to:

  • Develop ways for the insurance sector to blend information from the scientific community's climate models, as they evolve, with its own loss estimation models
  • Improve daily, seasonal, and annual forecasting of extreme weather, and adapt it for use in disaster prevention.

Advance the understanding of the relative global and regional vulnerability and adaptability of insurance and other financial services to climate change. The trend in losses from extreme weather events has raised questions about the insurance sector's vulnerability to climate change in some respects, although as a whole the industry could be quite resilient. Even less is known about the relative vulnerability or resiliency of other segments of the financial services sector. A more definitive assessment of the industry's strengths and weaknesses in the face of climate change is necessary, with specific needs to:

  • Continue analysis to disaggregate climate change, socioeconomic, and any other non-climate drivers of observed trends in historic economic (insured and uninsured) losses
  • Explore specific aspects of the industry's vulnerability and resiliency, including maximum probable insurance losses; insurer surplus available for paying claims; insolvency risk in local insurance markets; and ability to raise rates, reduce coverage, or otherwise decrease losses by shifting risk to others
  • Assess how climate change could affect the actual and perceived risk of existing loan and investment portfolios
  • Understand if or how investors are changing their perceptions of investment risk in light of potential climate change and explore actions that investors are taking in light of any changes in the perception of risk.

Explore the role of the financial services sector in dealing with risks to society from climate change. As intermediaries and risk experts, the financial services sector could play a positive role in efforts to deal with the risks of climate change. The sector also could play an important role in identifying potential synergies and conflicts regarding funding for adaptation and mitigation measures. Work is needed to:

  • Assess and develop financial instruments that can spread and hedge against the risks of climate change for developing and developed countries
  • Quantify the need for financial resources for investment in adaptation
  • Determine how the availability of funds for adaptation could be affected by the use of funds for mitigation activities and vice versa
  • Identify any synergies between options for adaptation and for mitigation.

Explore the range of possible financing arrangements to cover the cost of adapting to climate change:

  • Investigate potential financial resources needed over the next few decades to cover the cost of damage from climate change and adaptation to climate change
  • Evaluate alternative methods of covering such costs
  • Develop innovative finance schemes for issues of risk and security regarding long-term investments
  • Investigate the potential role of and effects on private and public financial services providers.
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