Trevor Maynard looks at the possible consequences of climate change for insurers.
Climate change has gone from being a point of discussion among scientists to headline news. An overwhelming body of expert opinion now agrees that the climate is changing more rapidly than we first thought, and that human activity is a major factor.
The facts speak for themselves. The ten warmest years on record have all been since 1990. Glaciers are melting, sea levels are rising, and the frequency of floods, droughts, landslides and windstorms is likely to increase.
These changes are naturally affecting the insurance industry. Weather-related catastrophes are costing the insurance industry more than ever before. In 2005, the industry saw the worst year ever for property insurers, resulting in claims of $83bn, of which over 90% relates to natural catastrophes. Last month, leading economist and academic Sir Nicholas Stern published a report on climate change that predicted an economic cost of $7trn to the economy if major steps are not taken to curb carbon dioxide emissions now.
Lloyd's has published two reports on climate change, and hosted an event which brought together leading figures from insurance, business, government and science to debate the matter. So what has been learnt and what can insurers and the wider business world do to tackle the issue?
Firstly, we need to update our risk management strategies to take account of climate change. Lloyd's requires all its managing agents to consider the impact of climate change on the level of capital they need to hold. We need to plan and prepare more carefully for future losses, rather than basing decisions on historical records, and watch carefully for “tipping points” which can lead to sudden changes in the risk environment.
Lloyd's is supporting the development of new technologies – the Lloyd's market provides about a third of insurance for waste to energy plants, and covers about a quarter of the world's wind farms – and investing in research to understand the impact of climate change on the industry. The market is also forming a series of partnerships with leading professional, academic and government experts to better understand the risks involved.
Climate change is of vast global importance. Many scientists believe that there may only be 15 years in which we can act to avoid the more extreme impacts. In any case, certain changes are unavoidable and will occur over the next 30 years. Insurers and businesses can play a vital role in adapting to these changes, but only by working together.