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Lloyds of London: 'Adapt or Bust' on Climate Change
Joel Makower, 25 Jun 06

Probably no sector is more conservative than the insurance industry, and I'm not referring to its political posturing. Insurance is, at its essence, a numbers game -- about risk management, probability theory, and certainty. And so it is noteworthy that the insurance industry's concern over climate change continues to grow, and that the warnings are becoming louder and clearer.

This isn't new, of course. We've previously covered reports on the growing weather-related economic losses being absorbed by the insurance industry, and on U.S. insurers' efforts to growing acceptance of global warming as a manifestation of the post-Katrina era.

But the noise level on this topic has grown considerably of late. Last week, National Homebuyers, the U.K.'s largest consumer-facing property purchasing company, issued a warning to homeowners and home purchasers to consider environmental changes while making decisions in the property market. It pointed to several profound changes taking place "that will affect the U.K.," including the desertification of southern Spain, the disappearing Alpine glaciers, and worsening Mediterranean droughts. It concluded:

The knock on impact to the UK includes the increased risk of storm damage, especially at coastal areas and flooding in the Thames estuary, and eastern England, from higher levels of rainwater running downstream, swelling rivers, and higher sea levels pushing water upstream. Other impacts could include increased coastal erosion and deposition levels, lower temperatures and freezing winters and changes in drying soil that could damage foundations as early as this summer. All this could affect property, and it's ability to be mortgaged, sold, and insured.

Meanwhile, Swedish scientists warned that climate change will increase the risk of flooding in parts of Sweden as rising temperatures bring more rain and less snow. Insurance companies face new challenges in areas likely to be subject to increased flooding, they noted.

The loudest warning was sounded by Lloyds of London, the world's oldest, largest, and most well-known insurance exchange, which this month issued a report urging insurers "to take climate change seriously or risk being swept away." With new weather patterns, exposures are changing and insurers need to act now, says the new Lloyd's report, titled Climate Change: Adapt or Bust (download-PDF).

The report is fascinating reading, given its frank, candid tone -- something not often heard from any business sector, let alone one with such conservative roots. For example, consider the report's conclusions:

  • We don't know exactly what impact climate change will have. But we do know that it presents society and the economy with an increasing level of uncertainty as it seeks to manage its risk.

  • We believe that it is time for the insurance industry to take a more leading role in understanding and managing the impact of climate change.

  • This means that the industry can no longer treat climate change as some peripheral workstream, simply to tick the regulatory and compliance box, or to support its public relations strategy.

  • Instead, understanding and responding to it must become "business as usual" for insurers and those they work with. Failure to take climate change into account will put companies at risk from future legal actions from their own shareholders, their investors and clients.

  • Climate change must inform underwriting strategy -- from the pricing of risk to the wording of policies.

  • It must guide and counsel business strategy -- including business development and planning.

  • And it must lie at the heart of a new impetus to engage with the wider world through meaningful, tangible partnerships to mitigate risk -- bringing corporate and social responsibility plans to life.

  • The insurance industry must now seize the opportunity to make a difference, not just to the future of our own industry, but to the future of society.

The implications extend well beyond the insurance industry, affecting every business sector -- and many consumers, too. The Lloyd's report says that the industry needs to stay ahead of the game by taking a new approach to underwriting, with pricing and capital allocation models regularly being updated to reflect the latest scientific evidence.

For example, current sea levels are higher in the Gulf of Mexico than in the past and, with sea temperatures rising, the industry must prepare for increased windstorm activity. It also means that US hurricane exposure will remain high and insurers need to plan for that. Risk modeling and pricing are key factors which the industry cannot afford to lose sight of.

How will this affect companies' ability to obtain affordable insurance? To the extent that insurers continually adjust their risk tables "to reflect the latest scientific evidence," how will the steady drumbeat of scientific studies on climate affect everyone's premiums? And what happens when the risks get become unmanageable, at least in insurers' views? How will rising costs -- or the unavailability -- of crop insurance, flood insurance, and other products that mitigate business risks affect business and economic well-being?

It's a topic with far more questions than answers.

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Comments

The insurance and re-insurance industry have enormous assets. Are they investing those in companies that offer solutions, such as wind and solar energy?

They have clout as institutional investors, and I'd like to see them use it.


Posted by: Daniel Haran on 25 Jun 06

For that matter, could they be encouraged to insure sustainable building technologies at a lower rate, to help defray higher costs? Is this already happening anywhere?


Posted by: justus on 26 Jun 06

I think to the extent reinsurers are moving their money, it's likely not in order to be part of the climate change solution. More likely, they're moving their money to avoid risk or exploit opportunities. Their view of climate change is not so much that it is a threat to our way of life as it is a threat to their cash flow.

The way that sustainable building technology gets a lower rate is by being more storm proof and thus less likely to be damaged by the climate. We may realize that sustainability ultimately has the same positive impact by reducing climate damage, but that's a big time window and a lot of dots to connect. Hurricane strapping and storm shutters pay back much more quickly and have a direct relationship to what interests the insurers: fewer or lower claims.


Posted by: dsgeorge on 26 Jun 06



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