The world's largest industry needs to play a leading role in addressing the world's greatest challenge - climate change. By David Hampton and Iain Watt
Every day there is more news about climate change. Recognition and understanding of the problems are gathering momentum and public awareness of the need to do something is palpable. Yet, despite this growing sense of unease, there is widespread apathy and ignorance about what to do and how to do it.
Today's problem solvers are faced with the daunting challenge of working out how to protect the world for our own healthy retirement, as well as the well-being of the next generation. UK political leaders like Tony Blair, David Cameron and Menzies Campbell are suggesting that they fully understand something must be done "on their watch" and that this is beyond party politics. Business leaders like Sir Richard Branson believe that making investments that address climate change is both a business necessity and a commercial opportunity. He has just pledged $3bn from profits over 10 years to combat global warming. Al Gore and other opinion leaders (including Sir David King - the UK government's chief scientist) have gone further and proclaimed climate change as one of the greatest challenges facing humanity.
The effects of climate change are becoming increasingly apparent (for example, rising extreme weather events, the melting of the Arctic sea ice and of glaciers, changing distribution of species such as disease-carrying insects. The list is long, growing and individual effects are forecast to become more pronounced. These natural changes are starting to have serious effects on people - thousands of premature deaths in Europe during the hot summer of 2003 - and global economies.
The insurance industry estimates that the financial damage caused by global warming costs the global economy hundreds of billions of dollars each year. In 2005, the hottest year on record, total losses due to natural catastrophes reported by the insurance industry reached over $210bn of which almost $100bn were insured. Worse, under business-as-usual projections, CO2 emissions will double over the next 45 years with potentially devastating consequences.
Time to act
Disaster is potentially just around the corner and the risk of any impending disaster should be a call to action for the insurance industry. What is the insurance industry actually doing about it?
In fact, the insurance sector is already in the forefront of dealing with the early effects of climate change. As part of normal business, underwriters have been forced to analyse the changing likelihood and impact of extreme incidents such as more frequent and severe storms, flooding, subsidence damage and other natural events.
Looking forward, however, the industry will need to do more both to develop its own business successfully and to help to address the underlying causes of climate change. The impact of climate change is more than the sum of different areas of peril and whatever action is taken needs to be joined up if it is to make a real difference.
The challenges that climate change presents for the insurance industry may seem obvious, since the impact of more extreme weather events on claims payouts is well documented and publicised. There are, however, other challenges - less direct but no less important - such as the need to invest in developing new products to address changing risks or the potential threats to brand and reputation, should insurers be perceived as scaremongers interested only in justifying higher premiums or restricting cover.
Not everything about climate change is bad news for insurers. There are also major opportunities that could profoundly reshape the industry of the 21st century. As a result of its size and its skills, the industry is uniquely positioned to be an advocate for minimising the impact of changes in climate that are now inevitable and, just as importantly, to call for more effort in limiting the extent of longer term climate change itself.
There are three important assets which insurers and re-insurers bring to the climate change battle:
• Leading edge skills in analysing and managing risk
• The ability to mitigate risk for other providers of financial services
• A privileged position as a major investor in many companies.
Minimising the impact
Globally, the industry is already using the first two of these levers to help minimise some effects of climate change through modelling of extreme weather events, development of new products and pressure to improve regulations like building standards. Such activities may mitigate the impact of climate change, but do not address the fundamental changes taking place that will have a longer term impact.
The industry could, however, step up a gear and use its influence and skills to reduce the extent of corporate and individual behaviour that contributes to climate change. Further-more, it has a fiduciary duty to protect shareholder capital at risk from climate change.
Climate change is man-made and, while some changes are now inevitable, many of the predicted changes can be avoided if sufficient action is taken now and in the near future to reduce carbon emissions. The industry has the capabilities to play a much greater role in helping to drive such action. For example, by taking the following three steps, the industry would make a substantial, positive contribution to solving the problem:
• Apply its risk management skills to help establish an appropriate set of regulations
• Use its leverage over investments, policyholders and borrowers from other financial institutions to help them address the causes and consequences of climate change
• Develop new financial instruments to ensure that the costs and risks of climate change are shared appropriately using forward-looking risk assessments.
Addressing the impact of climate change is more than another CSR problem, to be ranked alongside business "giving back" more to the local community or making the workplace more pleasant; it is an important issue that makes essential business sense for the industry. GE's Green is Green motto says it all - they know sound environmental behaviour is good for profit.
The UK insurance industry is a beacon for the rest of the world and, in stepping up to the mark on climate change; it has a once-in-a-lifetime opportunity to make a real difference and to enhance its own reputation.
Having restored their capital base in recent years, some insurance companies seem better equipped to meet claims associated with catastrophic events out of revenues.
Moreover, for those companies which take the lead in rising to the climate change challenge there will be new opportunities to strengthen their own competitive position and reputation.
But, collectively, the insurance industry can become stronger in an ever-more eventful and competitive world. This will only happen if the movers and shakers build a common platform for taking action on climate change, an issue which is arguably the 21st century's greatest challenge. IT
David Hampton is a partner at Cairneagle and Iain Watt, former marketing director at AXA Insurance, is an associate of Cairneagle Associates LLP, a strategy consultancy with a climate change practice