The Heat Is Online

Lloyd's of London Sounds Climate Alarm

Insurers must act on climate change, says Lloyd's

Reuters News Service, June 5, 2006

 

LONDON (Reuters) - Insurers must do more to understand the implications of climate change on their businesses or risk going out of business, Lloyd's of London said in a report released on Monday.

 

Recent scientific evidence on the buildup of greenhouse gases has shown that some degree of climate change is now inevitable and could actually happen faster than was previously expected, the report said.

 

"The insurance industry must start actively adapting in response to greenhouse gas trends if it is to survive," the report says.

Lloyd's, the world's leading specialist insurance market, said the insurance industry had been slow to analyse how the increasing weight of scientific evidence into climate change would affect its business.

 

"We believe that it is time for the insurance industry to take a more leading role in understanding and managing the impact of climate change," the report concludes.

 

Insurers stand in the front line of climate change in terms of footing the economic bill of natural disasters. Last year was the industry's costliest ever for catastrophes, with overall claims of $83 billion (44 billion pounds), of which $65 billion came from hurricanes Katrina, Rita and Wilma which hit the United States.

 

The report raises the prospect that insurers may face even higher claims from an increasing number of natural disasters in years to come, caused by climate change.

 

Lloyd's warns companies to take action to help protect themselves or face oblivion.

 

LOOKING BACKWARDS, NOT FORWARDS

 

The insurance industry still bases too much of its decision-making on historical weather patterns rather than what is likely to happen in the future, the report said.

 

For example, insurers could take account more in their pricing of the generally accurate predictions made by a number of forecasters into the number and severity of Atlantic hurricanes that are likely to occur each year, the report said.

 

Lloyd's echoed predictions from industry rivals such as Swiss Re that the number of severe hurricanes each year is likely to remain high in the coming years and that insurers should therefore raise their prices to reflect that.

 

The report said it was important for insurers to make a profit from their underwriting activities, because not only are they facing higher disaster-related claims, but also their investment income might be cut as climate change hits the business of firms in which insurers invest.

 

Insurers could use their influence as some of the world's biggest investors to make companies in which they have stakes act more responsibly by encouraging "'climate proof' behaviour from the boards of large corporations", the report says.

 

Lloyd's also raised the question of whether most weather-related risks would remain insurable in the future.

 

It said it currently saw the vast majority as insurable, providing insurers are free to set the price of cover.

 

But if regulators were to try to limit the prices insurers charge to take disaster risks or if climate change were to occur faster than expected, then Lloyd's might change its view, the report said.

Insurers may increasingly look to either restrict or even withdraw cover for flood risk in some areas, as the cost of flood claims rises, the report said.

 

"Solutions must be found now to reverse the trend towards further increasing population concentrations in affected areas, especially coastal areas," the report concluded.

 

(c) Reuters 2006. All rights reserved.