Invest in a green future

The big freeze may be here but threat of global warming looms as large as ever. In fact, 2010 was the hottest year on record according to the Met Office. Despite the coldest start to the year in Britain for 30 years, the world has been 0.94F (0.52C) warmer than the 30-year average of 57.2F (14C).

The United Nations Framework on Climate Change negotiations kicked off in Cancun this week. Following the disappointment of the Copenhagen talks earlier this year, it is widely hoped that world leaders can finally seal a deal on how to tackle climate change. To mark the event, ClimateWise held a conference in London to discuss how the insurance sector could work with policy makers to mitigate and manage the effects of climate change.

Energy and Climate Change Secretary Chris Hulme said that the insurance sector was at the “sharp end” of the debate on climate change and praised the sector for its attempts to tackle the challenge of climate change head on.

Floods in the front line

It is no surprise that the insurance sector should be in the front line of the battle against global warming. In the UK the most obvious effect of climate change has been a huge increase in the frequency and extremity of flooding – which has taken its toll on the industry. According to the ABI, since 2,000 insurers have paid out £4.5bn in claims related to flooding. This is up 200% on the £1.5bn paid in the previous decade.

Consequently, this is a massive problem for the insurance sector, and an even bigger problem for communities who are unable to access adequate levels of cover because they are regarded as too high a risk. Chief executive of Willis Re Global Analytics, Rowan Douglas, outlined at Climatewise that one of the fundamental roles of the insurance industry is to help society bear the cost of extreme events. But, he said, insufficient insurance penetration coupled with inadequate modelling means that it is a problem for insurers, and consequently the reinsurance market, to meet the demand for increased cover.

Douglas added that more work needs to be done on creating models to assess the risks of man-made climate change. He pointed out that while the cost of man-made disasters wreaks annual economic losses of $220m, this only amounts to insured losses of £36bn. “This means as an industry we are barely responding to 15% of losses," he said. "That is a woeful response to this challenge.”

Possibly more claims than asbestos

Another challenge for insurers is the growing reality of climate change litigation as companies become liable for accelerating the effects of climate change. The numbers of suits are growing in the US and the insurance sector may have to steel itself for a spate of climate change suits in the future. According to reinsurance giant Swiss Re, climate change liability claims are set to grow at a faster rate than asbestos-related claims. While substantial legal hurdles to climate change lawsuits remain, legal experts predict that a landmark ruling on climate change is not far off.

Consequently, there is no doubt that the challenges are huge. Not only does the insurance sector face increased claims stemming from the effect of climate change, it is also under huge pressure to develop better risk assessment models as well as facing the prospect of massive liabilities developing in the future.

Speaking at the conference, Allianz chief executive Andrew Torrance said: “The global economy is on the path of climate change that could see temperatures going beyond 2 degrees Celsius – we are in danger of seeing temperatures that could exceed that. I think it would be wrong to be in any way to be complacent. It is very much in our interest to work at a global level to take action to limit climate change.”

Invest away from carbon-dependence

Chief executive of Aviva Investors, London, Paul Abberley, suggested that the insurance sector could take a proactive rather than a reactive role when grappling with the challenge of climate change. He pointed out that the sector sits on large amounts of capital and said that it could play part in moving investment away from carbon-dependent companies.

But he warned that since the financial crisis investors had become risk-averse, and grappling with the challenges posed by climate change would require a greater appetite for risk. “We need private investors to take considerable risks because some of the investment we need to make could take 20 to 30 years integration and they may not work,” he said.

The message is clear. While there may be risks investing in a green future, failure to do so will create even greater risks. Many believe that the conference in Cancun may the be the last chance to thrash out a clear solution for fighting climate change. The insurance sector is on board to meet the challenges of climate change but it will need the help of key policy-makers and the Government to make a substantial difference.