The Impact of Environmental Change on the Insurance Industry
1. How does the underlying uncertainty about climate change and the future of international responses create opportunities and risks for the insurance industry?
2. What areas of insurable risk are available to be developed by insurers?
3. How can insurers address the â€śextreme tailâ€ť risks associated with environmental risk?
THE IMPACT OF ENVIRONMENTAL CHANGE ON THE INSURANCE INDUSTRY
This was one of the panels at the 2010 Madrid Annual IIS Seminar including Maryam Golnaraghi (WMO ), Ernst Rauch (Munich Re) and Rowan Douglas (Willis), with Andy Giffin as Moderator.Â
See the presentations and a video of the session
In recent years we have faced some extreme events beyond our normal range of expected behavior â€“ 9/11, Katrina, the meltdown of financial markets and the Deepwater Horizon disaster come to mind.Â We need to further rethink our risk assessment tools to better identify, quantify and price insurable risks, recognizing the potential for such extreme exposures.Â We add historical experience of extremes to our models but remain vulnerable to the unpredicted extreme events to come.
Environmental extremes are often limited to a particular geographic area or type of activity, but windstorms, earthquakes and others can have widespread effects, for example hurricanes with multiple landfalls and Â drifting volcanic ash.
Exposures from climate change involve a very different scope and complexity.Â The Deepwater Horizon disaster reminds us of our limited understanding of the oceans and what to expect from their movements and conditions.Â Climate change involves the oceans as well as the whole of the earthâ€™s land masses and atmosphere.Â This is a massive interactive system, including man as an influential actor.
There is strong evidence that man has played an important role in recent global warming, by contributing to higher greenhouse gas concentrations.Â In particular, CO2 emissions threaten to raise the earthâ€™s temperature further, causing extensive dislocation and disruption to the whole bio-system and significant economic and social dislocation.Â Â Short term impacts of the current warming process are intensification of drought, torrential rains and violent storms.Â Climate research is being brought to bear on short term weather prediction to better prepare organizations such as the Red Cross and Red Crescent prepare for disaster relief.
Before effective action can be taken, there needs to be a better understanding, widely shared, as to what is really going on, what we can do to influence it in a positive way, and what it will cost to address.Â Because an effective solution requires cooperation among all the inhabitants of the planet, this phenomenon raises one of the most difficult political and economic challenges the world has ever faced.
Much work is now underway to improve the science of climate change, including that of international bodies such as the Intergovernmental Panel on Climate Change (IPCC). Â Â The U.S. National Oceanic and Atmospheric Administrationâ€™s recent report, â€śState of the Climate in 2009â€ť reconfirmed warming trends using ten key climate indicators with the help of 300 collaborating scientists from 48 countries. Not surprisingly, given the stakes, this is not without controversy or disagreement, on both causes and effects. Â The basic facts of warming trends and build up of CO2 are not seriously challenged.Â It is the consequences, timing, need for action and responsibility that are debated. Â Structures for international agreement on actions steps are in place but agreements to date are incomplete, with major nations not yet in sync.Â Among the complications are the assessment of responsibility among developed and developing nations and the costs and benefits to be assigned to the many generations of people influenced by the mitigation efforts or lack thereof.Â For example, CO2 emissions today will contribute to CO2 concentrations centuries from now.
The panel has not attempted to settle the public debates about climate change;Â it is trying to better understand what information we can act on with reasonable confidence.Â
The United Nations Framework Convention on Climate Change (UNFCCC), a global organization of 194 countries concluded the Kyoto Protocol in 1997, with 191 signatories and 37 countries agreeing to specific emission control targets in 2008-2012.Â At the Copenhagen meeting of the group in 2009, after much build up, the conference ended in disarray in an attempt to update Kyoto prior to its expiration date in 2012.Â The more low-key meeting in December 2010 in Cancun boasted modest achievements of commitment on funding for developing country efforts for mitigation and adaptation.Â More important was the restoration of a more positive atmosphere toward continued progress.Â (See www.unfcc.int for details.)
So, what can insurers and reinsurers do to provide climate-related risk transfer and risk mitigation, including participation in climate management projects.
The insurance industry can play a large role in adapting to climate change and mitigating its effects by sharing its risk analysis, providing coverage for short-term effects (e.g., severe weather) and promoting avoidance of long-term effects (e.g., efficient energy use, avoiding exposure to future risks).Â Large multinational insurers and reinsurers are contributing to research and offering products to address immediate effects.
Our panelists included Dr. Maryam Golnaraghi of the World Meteorological Organization who outlined some of the current thinking of how our climate is changing and initiatives underway to address the problems.Â Then Ernst Rauch, Head of Corporate Climate Centre at Munich Re offered his perspectives on the issues as a climate specialist in a major reinsurance organization.Â Finally, Rowan Douglas of Willis described some of the emerging approaches to loss transfer and mitigation.
Potential for such extreme exposures
See Maryam Golnaraghiâ€™s presentation for the panel
Higher greenhouse gas concentrations
â€śState of the Climate in 2009,â€ť U.S. National Oceanic and Atmospheric Administration, July 2010
http://www.ncdc.noaa.gove/bams-state -of-the climate
See NOAAâ€™s climate services website:Â www.climate.gov
â€śWorld Development Report 2010: Development and Climate Change, World Bank (Washington, 2010)
Significant economic and social dislocation
â€śThe Economic and Politics of Climate Changeâ€ť, Dieter Helm, Cameron Hepburn, Eds., Oxford University Press (Oxford, 2009)
Intergovernmental Panel on Climate Change (IPCC)
See IPCC website for various material on the assessment process and status â€“ www.ipcc.ch/
â€śAgreed Reference Material for the IPCC Fifth Assessment Report,â€ťÂ www.ipcc.ch/pdf/ar5/ar5-outline-complication.pdf
The insurance industry can play a large role
â€śGlobal Change, Acts of God, Acts of Man, Acts of Nature and Systemic Risks,â€ťÂ Walter R. Stahel, Risk Management, The Geneva Association, May 2010.
â€śFrom Risk to Opportunity:Â Insurer Reponses to Climate Change,â€ť Evan Mills, A Ceres Report, April 2009 (See HTTP://insurance.ibl.gov/opportunities.html)
â€śAdaptation to Climate Change:Â Threats and Opportunities for the Insurance Industry, Celine Herveijer (PWC), Nicola Ranger (LSE) and Robert E. T. Ward (LSE), The Geneva Papers, 2009Â (See www.genevaassociation.org)
â€śMajor Tipping Points in the Earth:Â Climate Systems and Consequences for the Insurance Sector,â€ť Allianz (See www.knowledge.allianz.com/climate
1. How have the economic crisis and aftermath affected insurance lines, e.g., higher claims, decline in sales, growth in sales, new products?
2. How has the experience in financial services affected the direction of insurance regulation? Is insurance regulation affected by mistaken assumptions about industry needs and norms, e,g., excessive restriction on the use of needed hedging facilities?
3. How will the recent experience change risk management practices in the industry?
4. Will problems in the derivatives markets reduce or change the use of capital markets for insurance activities?
5. What new market opportunities are created by the recent crisis?