by: Joel Makower
Probably no sector is more conservative than the insurance industry, and I'm not referring to its political posturing.
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. I've previously covered reports on the growing weather-related economic losses being absorbed by the insurance industry, and on U.S. insurers' efforts to examine the impact of climate change on the U.S. insurance industry and on insurance consumers.
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.