Dealing with uncertainty: the insurance industry and climate change

Uncategorized0

Dealing with uncertainty: the insurance industry and climate change

Insurers are paying out heavily for extreme weather events – but the industry could be doing more to engage with climate change

UK floods

Extreme weather events are pounding the insurance industry: last year’s floods cost more than £400m. Photograph: Matt Cardy/Getty Images

Bad weather does a lot more than spoil barbecues. Last year’s floods in the UK caused £400m-worth of damage, while this summer’s floods in central Europe could lead to insurance claims for as much as €6bn (£5.1bn); at the other extreme, last year’s droughts in the US Midwest’s corn belt caused around $20bn (£13bn) of damage to agricultural crops.

There is still not 100% agreement in the industry as to whether or not man-made climate change exists but arguing the point rather misses the bigger issue, said Laurence Baxter, the head of policy and research at the Chartered Insurance Institute, the professional body.

“I have seen the debate waged over the last few years – individuals in and out of the industry – and in that they miss the whole point, which is that extreme weather events are on the rise and a number of weather-related records have been broken in the last few years. The climate is changing and as the sector responsible for managing risk and how it is mitigated… the insurance industry does play a big part.”

The industry is starting to recognise this. The CII incorporates the issue into its qualifications and continuing professional development resources for its members, while a number of insurers got together six years ago to set up the ClimateWise leadership group to work together investigating the issue.

The group’s members have recognised that the number of extreme weather events and other climate-linked changes have significant implications for their businesses, said Katharine Thoday, head of the ClimateWise secretariat at the University of Cambridge Programme for Sustainability Leadership. The group has set up six principles, including informing public policy, incorporating climate change into members’ investment strategies and reducing the environmental impacts of their business.

One of the underlying challenges is that climate change is still far from fully understood, meaning that companies are always dealing with uncertainty, said Dr Stefan Straub, Munich Re’s spokesman on climate change and renewable energy. “No one can say ‘that’s the last piece of the puzzle’. The research is still going on. We still don’t know enough, which makes it difficult to assess the risks in the right way.” It funds or is otherwise involved in a large number of research initiatives to help improve understanding of the issues involved, as well as supporting the development of renewable energy technology.

Knowledge may not yet be complete but it is improving, said Jon Williams, a partner at PricewaterhouseCoopers, which reviews insurers’ performance against the ClimateWise principles. The industry is making the most progress in research and development and risk modelling, engagement with policymakers, and product innovation, he said. “For example, in the UK 10 years ago flood-risk modelling was a high-level crude postcode lottery,” he said. “Now it’s sub-postcode mapping of how water will flow across terrain.”

Companies are also starting to create products that try to change consumer behaviour, said Williams. Aviva’s “pay as you drive” policy, which means heavy car users pay higher premiums than those who drive for short distances, is one example; another is the way in which insurers make assets more resilient to risk after they have had to pay out. “So in a flood-risk area, expect to have your power points reinstalled 24 inches up so that if it floods again it won’t take out all your electrics.”

But the picture is not all positive. For a start, there is still much more that could be done to develop new products that help mitigate risk, said Williams. “And another area where relatively little has been done is understanding the risks of climate change to those more exposed to them, especially in developing countries.” This is becoming increasingly important as insurers look to these markets for new opportunities for growth now that the UK market is saturated – Williams’ pun.

“What that does is take them into markets where governments are typically less able to adapt to climate change so risks are higher, and much higher for insurers,” he said.

Even insurers with no direct involvement in developing markets need to understand the issues there, he said. “About a third of premiums insured in this market come from overseas so they are already exposed to overseas. Secondly, the world is pretty connected and the biggest threat to the UK from climate change is through the supply chain, particularly through food security.” A British insurer that offers business continuity insurance to a company based in the UK could easily be exposed to climate change risks down the line, for example if a drought in Kenya wiped out a major supplier’s crop.

He also believes that insurers need to think harder about what they can do with their asset portfolios. This is a tricky area, said Thoday. “The outside perception is that, because insurers from the underwriting side have been thinking about these issues… there’s a strong sense that they should be applying it to their investments,” she said. “In reality as a business those two things are very separate. For all kinds of regulatory reasons you don’t share your risk analysis from the underwriting side with the investment decision side.” That said, this is a question that’s starting to get on the agenda of the investment side, she added.

This content is brought to you by Guardian Professional. Become GSB member to get more stories like this direct to your inbox

  • Sustainable business courses

    Practical half-day courses from the Guardian on sustainability communications, brand, collaboration and leadership. Book now.

About Guardian Professional

  • Guardian Professional Networks

    Guardian Professional Networks are community-focused sites, where we bring together advice, best practice and insight from a wide range of professional communities.

    Some of our specialist hubs within these sites are supported by funding from external companies and organisations. All editorial content is independent of any sponsorship, unless otherwise clearly stated. We make Partner Zones available for sponsors’ own content. Guardian Professional is a division of Guardian News & Media

Leave a Comment

You must be logged in to post a comment.

This site uses Akismet to reduce spam. Learn how your comment data is processed.