Risk and opportunity

Something is up with the weather. I’m not a scientist or a catastrophe modeller and I’ve forgotten most of my geography A-level, but it doesn’t take a genius to note the bizarre weather we’ve been having lately (and we haven’t even seen any real hurricane activity yet).

Back in January, Windstorm Kyrill’s footprint covered much of Europe, costing insurers and reinsurers in the region of ?5bn (making it the 12th costliest natural catastrophe since 1970, according to Moody’s).

In the UK, it has been raining incessantly for a month, often torrentially. Any hopes of a traditional English summer are fading along with our tans. The Association of British Insurers estimates the cost of claims from flooding will be around £1bn.

In Australia, insurers are tallying up the costs of fatal storms and floods that hit areas north of Sydney at the beginning of June. Then there was a rare cyclone – Gonu – which hit Oman and Iran causing in excess of $1bn in losses. In the US, wildfires in California were apparently exacerbated by a dry winter. Costs could have spiralled to $1bn had the fire spread to Lake Tahoe, predicts Risk Management Solutions.

The freak weather we’ve been experiencing is an ever-present warning that our climate is changing. Granted, there have always been storms, fires and floods and yes it does always rain during Wimbledon, but these “abnormal” events are stacking up and insurers and reinsurers are having to pick up the tab.

“We cannot risk being in denial on catastrophe trends,” said Lloyd’s chairman Lord Levene in a recent speech to the World Affairs Council. He said the number of natural catastrophes around the world had doubled since the 1960s while insured losses had increased nearly seven-fold. The worst year on record was in 2005 with total global insurance claims of $83bn – over 80% from US hurricanes.

“Over the coming years, with warmer sea surface temperatures making landfall more likely, particularly destructive storms are a likely scenario,” Levene said. Indeed, scientists predict it will be an “above-average” hurricane season in 2007 (see page 23).

“That there is money to be made perhaps comes as a surprise

Helen Yates, Editor Global Reinsurance

In March, GR and its sister publications Insurance Times and Catastrophe Risk Management hosted a two-day conference on climate change in London. At the conference, Stephen Byers, co-chair of the International Climate Change Taskforce, told delegates that the insurance industry was “in the front line” and should be ready to deal with “new challenges, new threats and new opportunities.”

The threats are now generally accepted. The challenge, it seems, is to move beyond the doom and gloom scenarios to look at solutions and even business opportunities. This will be the focus of our next conference in October (visit www.globalreinsurance.com for details).

Insurers and reinsurers are already exploring alternative and increasingly sophisticated solutions to managing the climate change risk. The popularity of cat bonds, securitisation and other means of offloading risk to the almighty capital markets continues with as much fervor in 2007 as it did in 2006 (see page 46).

That there is money to be made perhaps comes as a surprise. The industry should “seek out new commercial opportunities that would be good for the sector and the bottom line,” insists Byers.

Cover for green energy projects is taking off. Ascot, ACE, AIG and Royal & SunAlliance have all launched dedicated renewable energy units and Munich Re is offering “Kyoto cover” for investors involved in clean development projects. The insurance market for wind energy alone is expected to be worth over £1bn by 2015. Products that offer discounts for homeowners and motorists who reduce their carbon emissions are also potentially lucrative.

The rewards for those who wake up to the business potential are great: new revenue streams, enhanced reputations and the opportunity to play a small but vital part in the bid to tackle climate change.