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Insurers put governments in shade on climate change

Insurers are taking matters into their own hands on climate change issues, moving past political posturing to set themselves up to deal with volatile weather and related catastrophes.

Executives from 66 insurers this month signed a Geneva Association climate risk statement outlining how the industry can help international efforts to address the issue, even though its existence remains controversial in politically conservative circles. The statement affirms the global industry’s long-held view on the dangers of global warming and the need to take action.

“The prospect of extreme climate change and its potentially devastating economic and social consequences are of great concern to the insurance industry,” the statement says.

Standard & Poor’s (S&P) says many in the industry are already active on the issue, and the ratings agency looks favourably on insurers and reinsurers that include it in their planning.

“Whether or not a direct result of climate change, the number and frequency of extreme weather events have increased,” S&P says in a report. “Our view is climate change is another factor contributing to the challenges of modelling extreme weather events.

“For that reason, we take a favourable view of (re)insurers that consider how climate change, despite its uncertainties, may affect extreme events in capital modelling and exposure management.”

The agency says disregarding climate change could lead insurers to accept higher catastrophic risk than they would usually.

In the political world, countries are preparing for the UN climate change conference in Paris at the end of next year, which aims to develop a broader agreement on international action than currently exists.

Meanwhile, Australia faces criticism from European countries after the Federal Government left climate change off the agenda for the G20 summit in Brisbane in November.

“There was a surprise that environment wasn’t considered one of the priority issues,” Italian ambassador to Australia Pier Francesco Zazo told an Australian National University forum last week.

Michael Butt, who co-chairs the Geneva Association’s climate risk and extreme events working group, says insurers left a recent meeting in Toronto with a sense there was more they could offer, given their practical experience and knowledge.

“Many of these issues related to extreme risks can become political, and if issues become political they tend to become short-term, because the political process is relatively short-term,” he says.

“Our view as the industry is a long-term one, and we have accurate information over pricing risk, so we can put out messages as to what the real risk of doing something is – for instance, rebuilding in a flood plain.”

The association’s statement includes commitments to research and mitigation, and it calls on policymakers to collect “robust data” and make it freely available for risk assessment.

“We encourage political processes to work towards a better understanding of the potential costs of climate change and the advantages of market-based solutions,” the statement says.

“We are willing to play a major and concerted role in global efforts to counter climate risks.”

S&P says a survey of insurers in California found 75% consider the impact of climate change on their business but do not explicitly allow for it in pricing and modelling, given the impact will likely be felt at least five or 10 years down the road.

Insurance is typically based on annual contracts, and is therefore well positioned to gradually factor in climate change costs as they emerge, S&P says.

Weather events alone are unlikely to lead to ratings changes, unless the capital impact goes beyond reinsurance protection or there are significant reinsurance defaults.

“We don’t expect climate change per se to have a ratings impact over the next three to five years, unless it causes a sudden increase in the number and magnitude of extreme events,” S&P says. “Meanwhile, we will continue to follow developments.”

The Geneva Association notes the Intergovernmental Panel on Climate Change, set up by the UN Environment Program and the World Meteorological Organisation, indicates changes are occurring faster than projected and humanity’s influence is “very material”.

S&P says the insurance industry is well-prepared to deal with natural catastrophes of the magnitudes experienced recently, and many insurers and reinsurers it rates have processes in place to monitor the potential impact of climate change.

“That said, while the understanding of climate change is still developing, we believe a sudden spike in the frequency and severity of weather events could test the industry.”