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Insurers Near Center Of Climate-Change Debate In Copenhagen

Source: Dow Jones

Posted on 10 Dec 2009

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With the number of extreme weather events continuing to grow around the world the insurance industry is finding itself at the very center of efforts to avert the worst effects of climate change.

But as drought and demand for water intensify; heat waves become more severe; downpours more violent; and destructive coastal flooding more frequent, some even in the industry say its traditional risk-management tool may not be up to the task.

"Perhaps no industry is as aligned with the interests of a changing climate as the insurance industry is," said Patrick M. Liedtke, managing director of the Geneva Association, an industry body, at a side-event at the U.N. Climate Change Conference in Copenhagen on Wednesday.

"But [tackling climate change] is not something that the industry can do by itself," Liedtke added. It requires flanking action from governments, policy makers, regulators, NGOs and a lot of public dialogue. The whole world can't be insured, only parts of it."

"Insurers are on the front lines of climate change," added Andrew Logan, director of the investor group Ceres' insurance program, in an interview. "Climate change has the potential to bankrupt the industry, or at the very least make it a lot smaller and a lot less profitable. So insurers have every incentive to push for solutions to climate change, including advocating for strong public policy."

Part of the debate taking place in Copenhagen is centered on addressing what, precisely, it will take to engage private insurers and harness their expertise in the large, complex and unexpected risk associated with increasingly calamitous weather patterns.

And while the issue is undoubtedly a pressing one, particularly for the under-insured societies of the developing world, it is also a cause for some confusion as weather-related coverage largely operates at the intersection of private and state mechanisms.

Plus, there is the fact that, at first blush, investors and policyholders at the household level - in the developed world, at least - appear to be little directly affected by weather-related catastrophes.

Their insurance premiums will almost certainly rise, but governments in industrialized countries often largely bear the direct cost of extreme weather events.

"Insurance has the ability to encourage risk reduction like no other economic tool by establishing risk-based pricing signals in the form of premium charges. However, insurance works best and most straightforwardly in protecting private assets, while climate change presents a test of both private assets and public goods," wrote analysts at Zurich Financial Services Group, in a recent research report.

"We certainly want to play as wide a role as possible in dealing with climate change but it's equally important to recognize that we have to have risk that is sensible and manageable in the context of the industry," said Allianz U.K. Chief Executive Andrew Torrance in an interview. "Our core skill is in the risk management area, so we are well-placed to provide advice on adapting to the growing climate risk, but if you look at the Anglo-American end of the spectrum the range of products at the household level probably isn't going to change all that much as climate extremes intensify."

According to Logan there is precedent for the insurance industry prodding society to manage new risks.

"Just as the industry historically asserted its leadership to minimize risks from building fires and earthquakes, insurers have a huge opportunity today to develop creative loss-prevention solutions for consumers, governments and insurers [hit by climate change].

In a way, suggested Logan, insurers have no choice.


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