World news | How will extreme weather conditions affect the insurance and energy sectors

Oxford/Exeter, May 29 (The Conversation) When Storm Isha hit Northern Ireland and northern Great Britain in January 2024, wind gusts of almost 100 miles per hour caused widespread property damage. This severe extratropical cyclone also affected the insurance and energy sectors. Isha caused damage that forced the insurance industry to pay out around €500 million (£427 million).

This is a significant financial impact, although much smaller than some previous extreme weather events, such as Storm Lothar, which affected much larger regions of Europe, causing losses of almost €10 billion.

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Storm Isha also affected the energy sector. Fallen trees and strong winds knocked down power lines, causing hundreds of thousands of homes to lose electricity. Some energy traders benefited as high wind speeds led to record wind power production and significant declines in energy prices. At the peak of the storm, more than 70% of the UK’s electricity came from wind turbines, compared with an average of 30%.

Energy systems are being pushed to the brink by storms and heatwaves, compounded by gas shortages and price increases caused by the war in Ukraine.

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Extreme weather events cause widespread economic damage, of which more than $100 billion (£80 billion) will be covered by insurance in 2023. Understanding these extreme phenomena is therefore of great social and economic importance. However, the effects of extreme weather vary by industry. An event that is favorable for the energy sector may be harmful for the insurance industry and vice versa.

Climate change is likely to intensify these extreme weather events, potentially increasing or changing their impact on the energy and insurance sectors. As heatwave frequency increases, pressure on energy systems is likely to increase. Stronger storms can mean more damage and potentially higher premiums from the insurance industry. It is therefore important that the meaning of extremes is understood in each context – this can help researchers like us and society as a whole to anticipate events and understand losses.

Extreme weather events are of interest in the insurance sector due to the possibility of causing destruction and damage requiring financial coverage. Hurricanes and strong tropical cyclones receive the most attention due to the damage they cause from wind and flooding. Between 2018 and 2022, these events caused economic losses of over $450 billion, of which just under half were covered by insurance. The costliest event of the last 50 years was Hurricane Katrina, which devastated New Orleans in the US in 2005, causing insurance losses of approximately $100 billion.

The insurance industry divides events with the potential for loss into primary and secondary risks. Basic threats, which include hurricanes, storms and earthquakes, have the potential to cause the greatest losses. Secondary hazards, such as fires or hail storms, occur more frequently and cause low to moderate losses.

In the case of fundamental risks, such as storms in Europe, it is easy to assume that more events result in higher insured losses. However, only the strongest events are of interest because they cause the most widespread damage. For example, during the last winter season of 2023-2024, Western Europe experienced a very large number of storms, but only one caused significant damage – on November 1 and 2, 2023, Storm Ciaran hit France, Belgium, the Netherlands and the UK, causing approximately 2 billion euros of insured losses.

Despite a minor impact on insurance, this winter season has had a very large impact on the agricultural sector due to widespread and continuous flooding that has affected farmlands and destroyed crops.

Another factor the insurer should consider is the affected area and economic risk. Strong wind gusts and heavy rainfall from a hurricane over the Gulf of Mexico or even sparsely populated parts of the U.S. coast have little impact. However, a hurricane hitting a built-up metropolitan area (like Hurricane Katrina did in New Orleans) will result in massive destruction and loss of life.

Insurance companies assessing risk must consider a combination of the most extreme weather systems and those affecting built-up and developed areas. The areas most at risk are quantified by examining historical events and assessing other possible scenarios generated by the models. Risk experts also consider what impact historical events would have today. The increase in risk may be due to population growth, the density of the built environment or GDP. For example, the impact of Hurricane Katrina would be $40 billion greater if it occurred today.

Many types of extreme weather conditions, from dust storms to heavy snowfall, can have an adverse impact on energy infrastructure, generation and demand. Windstorms and flooding can damage power lines or substations that supply electricity to homes and businesses. In October 2023, Storm Babet left over 100,000 people without power in northern England.

Extreme weather conditions also affect the amount of renewable energy produced by wind, solar and hydropower. Wind droughts – periods of low wind – are of particular concern. A prolonged wind drought from April to September 2021 affected the UK, Ireland and other parts of Western Europe, with wind speeds almost 15% below average. This means that more gas must be burned to produce enough electricity to meet demand. Met Office scientists recently calculated that there is a one in 40 chance of three consecutive weeks of low wind speeds (and low power generation) during any given winter.

Extreme weather conditions affect energy demand. Temperature influences the amount of heating and cooling demand, but wind speed, direction and precipitation also play a role. According to scientists from Spain, heat waves in Southern Europe are associated with an increase in energy demand by up to 10%, mainly due to air conditioning.

These impacts often overlap. Scientists across Europe have shown that wind droughts are a particular problem when they coincide with extreme temperatures (leading to high energy demand for heating or cooling). The impacts of extreme weather are further complicated by society’s shift towards a more weather-dependent energy system and the changing distribution of extremes in a warming climate.

As our understanding of the impact of extreme weather on these two sectors develops, it is imperative that weather and climate information is tailored to specialists and researchers in each sector so that it can help mitigate future damage and long-term impacts. (Conversation)

(This is an unedited and auto-generated story from a Syndicated News channel, LatestLY staff may not have modified or edited the content)

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