Whether you like it or not, you are going to be in the front line when it comes to climate change, Stephen Byres, former cabinet minister and today co-chair of the International Change Taskforce, told the insurance industry. New risks, new opportunities and a changing investment climate form the future topography for the sector was the message of his keynote address opening the Climate Change 2007 conference.
“There will be a totally new set of risks coming forward as a result of climate change. There will be new hazards, but there will also be new businesses emerging who will require cover,” said Byres.
Nor should the industry neglect the implications for its investment portfolio, he commented, although it will inevitably focus attention of the impact of global warming on insured propert. For example, as market mechanisms evolve to reduce carbon dioxide (CO2), they will have an effect on investment returns from particular sectors, as will changes in construction standards and regulations to enforce energy efficiency. Customers will want to know companies’ investment policies and what part they were playing in tackling climate change.
Byres also warned that if as seems likely, a changing climate means more extreme weather events, the insurance industry needs to beware of a potential threat to its reputation in the way it responds to losses. “Whole communities can be affected by severe weather conditions. People will be in a state of shock and upset. In these circumstances, it is crucial for insurance companies to respond sympathetically and quickly. The performance of one insurance company will be compared against another. With people often looking to blame something or somebody at times like this, then a failure to perform or to communicate effectively can put a hard earned reputation at risk.”
He outlined various ways in which the insurance industry should utilise the current worldwide focus on climate change and “seek out new commercial opportunities that would be good for the sector and the bottom line.”
His suggestions included lower premiums for energy efficient homes, new products for the global carbon market, for clean energy providers and carbon neutral companies, investment policies that favour a reduction in climate change and policy wordings that cover liabilities that arise out of these new circumstances, for instance for directors and officers.
In their corporate role, companies in the sector should ensure that their corporate social responsibility policies fully incorporated a well thought out approach to climate change. They could lead by example by becoming carbon neutral and promoting the fact, Byres said.
Speaking the day before the UK’s Climate Change Bill was published, Byers described four broad possible scenarios for the future, giving them each a not strictly serious title.
Strictly Ballroom where there are international agreements and concerted international action, creating a framework in which business is able to plan ahead with a degree of predictability.
Dirty Dancing where it all goes badly wrong, and we get international disagreement instead of agreement leading to uncertainty in investment markets.
Sleepless in Seattle meaning that we all get transfixed by waiting for the US elections and put everything on hold until next President is inaugurated in January 2009;
Hokey-Cokey where we do not have an international agreement but there are lots of separate initiatives at different levels
Currently, said Byers, we have an element of Sleepless in Seattle with a fair bit of Hokey-Cokey. However, we have already put so much in the way of greenhouse gasses into the atmosphere that the consequences will be with us for the foreseeable future. We must consider how the insurance industry should respond to the potential increase in liabilities that arise from severe weather conditions and to the greater public awareness and concerns about climate change.
Inevitably the business case will determine the industry’s response, but Byres argued, “This is a great opportunity to be at the centre of a crucial debate meeting the needs of society while growing a profitable sector of the economy. I think you are up for that challenge.”
Lee Coppack is editor of Catastrophe Risk Management.