Louis Perroy warns it is not only the planet at risk from climate change
I believe that the assets of financial institutions are under significant threat and I would urge the reinsurance industry to wake up to the risks of climate change.
Reinsurance companies have already witnessed an abnormal increase in the frequency and size of catastrophic claims related to the weather and are pointing in part to climate change. However, my research has identified that climate change should not only be feared for its catastrophic impact but should also be considered as detrimental to assets and liabilities more generally. Managing assets and liabilities adequately is vital to financial institutions, such as insurance and reinsurance companies, and climate change needs to be factored into this matching exercise.
Impacts of climate change on assets and liabilities include:
- The physical repercussions - warmer weather, rising sea levels or increased frequency of weather catastrophes will greatly affect liabilities of financial institutions such as health insurance but also asset categories such as property.
- New regulations such as the Kyoto protocol or the European directive on climate change, bring new constraints on industries emitting green house gases such as oil and gas and the energy sectors, among others.
- Finally, the disruption brought by climate change to the developed and the developing world will invariably affect world economies in future and have significant macroeconomic consequences.
So what can be done? Firstly, financial institutions must start reacting to this significant threat and institutional investors need to better understand the risks. I believe that institutions should start reallocating part of their assets to investments which will mitigate climate change such as renewable energies and low carbon clean technology. Additionally, financial institutions should use their financial weight to lobby government for more efficient measures against climate change.
The above comments are based on Mr Perroy's report, "Impact of climate change on financial institutions". The report has received contributions from the Institute of Actuaries and will be presented to the Institute on the 14 June 2005.