Weathering the storm

David Miliband, Secretary of State for the Environment, Food and Rural Affairs, commented at the ABI conference on climate change this week that the debate has "shifted gear" since the publication of the Stern Review. As insurers, we are on the front line of this debate - not least because we often foot the bill when the worst effects of climate change strike.

However, our role must not be simply to write out cheques, but to engage with policy makers and stakeholders to offer our expertise and partnership as the debate moves forward.

We hold a large volume of claims data, and we are experts in risk management. Stern argues that risk-based insurance schemes can be used to promote "good risk management behaviours".

Stern, indeed, goes further in that he argues that market interventions may potentially be necessary to promote proper risk pricing, for example, decision making by individuals and businesses (especially SMEs) would be more likely to take account of climate change if they had to take account of the full, risk-based, pricing of their decisions.

The debate around the influence that insurers can bring to bear through pricing to reflect the longer term risk in the face of short term balance sheet and profit and loss pressures is fundamental. Both shareholder expectation and current accounting practice result in a focus on the near term. For example, reserving has to be against incurred losses and not against potential future events.

In the case of climate change, an increase in catastrophic flooding is a real concern and yet our current pricing and reserving as an industry do not reflect this potential change in exposure.

While this may be in part due to the emerging nature of the risk, it is also constrained by the accounting rules under which operate. In a world where we need to be considering pricing and reserving for possible events over the longer term, the question to be answered is: "Is this approach sustainable?"

The Stern Review makes it clear that quality information to business, government and individuals is essential in developing a strategy to tackle climate change, and the insurance industry is well placed to deliver this information.

AXA has already conducted significant research into the effects of climate change on small businesses in the UK. The SME sector is clearly of vital importance to the economy, yet our research shows that 90% of small businesses remain under-insured, and are not taking climate change seriously enough.

This is a clear example of how we can contribute to the climate change debate through direct communication with our customer base. It is in our own interests, as well as in the interest of the economy as a whole, that our customers are better prepared.

Miliband was right to highlight the opportunities that exist for financial services, and particularly insurers. We should not view the current debates as burdensome, or action on climate change as too costly. In terms of future opportunities, we should be following closely the evolving debate on emissions trading.

The EU emissions trading scheme as it stands is already highly significant, and it is likely to expand. There will, furthermore, be opportunities to invest in new low-carbon technology; and as climate change is taken increasingly seriously among the public, new markets will open in green financial products.

Stern's stark warning to us all last week showed the cost of inaction in tackling climate change to be as high as 20% of global GDP, which Miliband described at the ABI conference as equivalent to the impact of both world wars and the Great Depression combined.

It is clear that there is more than a scientific and moral imperative to act on climate change, and as insurers, we must rise to the challenge. IT

Peter Hubbard is chief executive of AXA Insurance