Emma Jones summarises the opening panel discussion

There is little argument among insurers that the increasing effect of climate change will have a profound effect on the industry, both in terms of liabilities and on the value of insurer assets.

“Let’s have no more debate, said Peter Hubbard, chief executive of AXA Insurance. “It’s time to do something.” Since last year the insurance industry wrote $3.4 trillion worth of premiums worldwide, it would be an integral part in the global response to climate change.

Professor Julia Slingo argued that the scientific work on climate change was incomplete and the debate was far from over. Slingo, director of climate, at the national Centre for Atmospheric Science, as well as the acting director at the Walker Institute for Climate System Research and a member of the Willis Research Network, said, “The debate about what it’s going to mean for all of us and also to one of the most important industries charged with protecting us from climate change, and how you are able to interpret the science, is very important.”

She explained that from a scientific standpoint there was a huge amount of work still to be done on hazardous weather, and that changes in extreme evidence are much more difficult for scientists to predict than developing trends. Rolf Tolle, director of franchise performance at Lloyd’s, did not disagree, but at the same time he has no doubt that the insurance industry has to live with an expectation of larger catastrophic events. Climate change could also spawn new liability claims, such as class actions. For example, there could be class actions against the directors and officers of large greenhouse gas emitters or claims against architects in the aftermath of a catastrophe for failing to take the new weather conditions into account in their designs.

“This means, argued Tolle, “that over the course of time in order to cope from an industry perspective, we will need to have enough capital to make the capacity available. When we set capital, we will definitely have a bigger requirement and we may have to insist on making changes to terms and conditions in order to give coverage that the customer wants.”


He stated that Lloyd’s is already advising its market members that they must consider the impact of climate change in their business now. “It is true that there is a lot of uncertainty and I agree that the debate is not over, but we have some knowledge now and that should be brought in on the capital side.”

Assets, too

The panel stated that climate change will not only have an impact on both sides of their balance sheets, on the liability site through greater frequency and severity of losses, but also on the value of assets through the reaction of financial markets. Said Tolle, “It will have a definite impact on insurer asset values. Arguably, the equity and property markets will take the largest hit, but with corporate bonds likely to be effected too.”

In the opinion of Ernst Rauch, head of meteorological risk, geo risk research, at Munich Re, assets may be affected more than liabilities and in that respect, creative hedging strategies and investment in sectors which respond in the aftermath of climatic events, must be seriously considered by the industry in the future.

Hubbard linked the issue of unsettled financial markets to insurers’ role as major institutional investors. Customers buying life insurance and investment products would look to insurers to create more certainty and less volatility. Insurers could also use their substantial amounts of capital as investors to encourage climate-friendly enterprise. He saw it as a great opportunity.

While insurers admitted that the industry has to factor in the impact of climate change today and not in the future, there is also an agreement that with it comes opportunity.

Rauch said it is one area the industry had to address in greater detail. “Where ever there is risk, there is also a chance and we cannot miss out,” he added.

Although some forms of traditional insurance and reinsurance will survive the test of climate change, in addition insurers will be required to develop new means of protection. Climate change is not something the market can just ignore and get on with business as usual. “So what can we do?” said Tolle. “We can work with policyholders to help reduce losses, which will lead to lower premiums and maintain insurability as long as possible. If we don’t do that, then we will see certain risks become uninsurable. ”

While the insurance industry has taken a unified approach to the growing issue of climate change and has accepted it must work with the scientific community to gain a greater understanding of the consequences, insurers also agreed they must continue to lobby Government.

With an estimated 2 million properties in the UK at risk of flooding and predictions by scientists, such as Professor Slingo, that changes in rainfall patterns will alter the levels of exposure in the UK and beyond, one area of particular concern to insurers is flooding.

According to Slingo, everything the industry will have to deal with in relation to climate change in the future will be connected to the water cycle. “We are seeing some very large scale changes in rainfall and that will have some profound effects,” Slingo added.

Hubbard insisted that although the industry had already worked with Government to produce a statement of principles on flooding, he was confident more could be done.

“We looked at how much customers in flood areas are being subsidised by those that are not,” he said. “The figure that emerged was £45m. As we are not one of the biggest property insurers in the UK, customers are probably being subsidised to the tune of £1bn in the UK.”

As a result, he insisted that the Treasury needed to increase spending on flood protection in order to alleviate future problems, a theme which emerged even more strongly in the panel discussion on UK flooding.

While politicians and professions, such as insurers, still have some way to go to convince the public of the potential impact of climate change, Rauch insisted that the industry had a responsibility of its own to protect the next generation by reducing emissions and addressing the problem now.

But Tolle warned, “One thing we have to remember is we cannot force change as an insurance industry. We operate on a global scene, a very competitive global market and insurance is not a tax.”

Instead, what it can and should do is lead by example in taking action to reduce its own carbon footprint before leading others to do the same.

Emma Jones is a reporter on Insurance Times.