Let's talk business on Climate Change and the Insurance Industry
Climate change poses a major risk to the global economy: It affects the wealth of societies, the availability of resources, the price of energy and the value of companies.
At the same time, the need to revolutionize the way we use energy opens up a new universe of options for economic development and social benefits.
The financial industry has a two-fold responsibility. On the one hand, it needs to prepare itself for the negative effects that climate change may have on its business and on its customers. On the other hand, it can significantly help mitigate the economic risks and enter the low-carbon economy by providing appropriate products and services.
Integrated financial services companies can turn these risks into opportunities. Implementing these actions will mean big steps forward in developing sound business for a living planet.
Climate Change & The Financial Sector: An Agenda for Action
Allianz Group and WWF
“In January 2005 there was a tornado in North Dublin. The impact was localised. That same day, Carlisle in the UK had flash flooding which cost Stg£70 million. The storm then went on up across Northern Europe and did huge damage. “We were just lucky”, says Brendan Murphy, Chief Executive of Allianz Ireland.
‘Weather event' analysis by Allianz Ireland shows a lower frequency of such ‘events’ in Ireland in recent years but there has been a marked increase in the severity of events.
Allianz Ireland has a website - Weathersafe - providing information to help homeowners minimise the risks and hardships of weather related loss by suggesting practical preventative steps in an easy to understand and relevant manner, but Mr Murphy says it’s difficult to persuade people to take the risks seriously.
“Do people want to talk about 2030 or 2050? Will people take it seriously enough? It's a gradual thing. To a large extent, people don't know what to expect because although climate has always changed the difference today is that the changes are principally man made, and that the pace of change is accelerating.”
But for the insurance sector, climate change is a big worry. That's why, last year the Allianz Group joined forces with the World Wildlife Fund for Nature (WWF) to publish a study on climate change in the financial sector.
Cynical observers will say there are plenty of reasons for insurers to talk up the problem, but Mr Murphy counters that the report was brought forward by Allianz’s investment division, not the risk managers: “All sorts of sectors are exposed over time. That’s why the impetus for the climate change report came initially from the investment perspective - understanding to what extent and how climate change will impact or enhance the value of investments is crucial if shareholder value is to remain protected.”
In Ireland, as elsewhere, the sectors that will experience the greatest initial economic impact are those that are energy-intensive - cement, aviation, metals, and energy industries like oil and gas, coal, and the power utilities.
Globally, governments are introducing policies to tackle the causes and combat the effects of greenhouse gas emissions with implications for the economics of entire industries.
Under the Kyoto Protocol Ireland agreed to a target of limiting its greenhouse gas emissions to 13% above 1990 levels by the first commitment period 2008-2012 as part of its contribution to the overall EU target. The Government published its National Climate Change Strategy in October 2000 setting out a framework for action to reduce Ireland's greenhouse gas emissions.
At the climate summit in Montreal last December, more than 180 nations unexpectedly agreed to develop far-reaching measures to combat climate change while the 39 nations governed by the Kyoto Protocol agreed in principle to make deeper cuts in the pollution emissions causing climate change when their present clean-up commitments run out in 2012.
The huge cost of recent weather disasters is bringing into sharp focus the urgent need for policy change. Mr Murphy points to last year’s hurricanes in the US: “2004 in terms of weather related disasters is estimated to have cost over $40billion. That was the worst year on record. Hurricane Katrina and the hurricanes this term are expected to cost north of $60bn dollars ... To put that in context, for Katrina alone they are talking somewhere between $50-$60billion. The previous largest loss in current financial terms was Hugo (1992) which cost somewhere between $23-25billion in current day terms ... So, you know, it's the severity of the impact in financial terms. If you look at the tsunami in Asia last year, it obviously had a huge impact in human terms, yes, but in financial terms no.”
In characteristic plain language, former US President, Bill Clinton, told the summit in Montreal “There is no longer any serious doubt that climate change is real, accelerating and caused by human activities”.
Mr Clinton said if something isn't done on climate change an international meeting on the subject 40 years from now might have to be held on a raft due to flooding from melting ice caps.
Irish climate threats
Ireland’s biggest climate change worry is the effect of global warming on the North Atlantic drift. As Mr Murphy puts it: “The major threat is the cooling down of the North Atlantic drift. Without that we would have severe winters and the impact is across the board on every industry. Our biggest exposure in Ireland is wind storm, and the combination of wind and tide together.”
“The average household 10 or 12 years ago had carpets on the floor so if you had a flood, the carpets came up and were dried out. Now you have wooden floors, white goods, electronic goods, pcs, hi-fi systems, ipods. There's been a huge increase in value. And that's also true on the commercial side.”
Manage the risk, lower the premium?
So does that mean that on the commercial side, a company that has a strategy in place will see a reduction in its premium?
“If you are a large enough commercial organisation your risk is individually rated. Like anything else, if you invest on the risk management side you will see the benefits - unless you are unlucky - but generally speaking it's about a safe work environment.”
We also need to consider where we locate because most of us will, given the choice, opt to live close to water.
“A lot of people will site themselves beside water because it is nice to look at but you have greater risk and there is more of a tendency now not to look to personal responsibility for those types of risks. We would say that, over time, if you are in a flood plain it’s going to flood. It’s a certainty; and of course that means you may not, indeed you should not get insurance. We map every single property that we insure. The reason we do that is for cumulation purposes. We don’t want 10 factories beside each other worth €20 million each. We don’t want every house in an estate. So you've got to monitor that.”
What about the role of Government? “To be fair, from a pretty much standing start,this Government has done quite a bit of work. There is a national policy on climate change and, in terms of what the Office of Public Works (OPW) has been doing in enhancing the defences - the work that was done in Kilkenny has helped, what was done on the Dodder has helped. We have to look at these things in an overall context. More needs to be done.”
“I would say that you work together with Government to try and move things forward. What you are seeing with climate change is a greater severity and lower frequency of storms. From an insurance point of view, we use past experience to project into the future. It gets more difficult to project.”
Climate isn’t the only area where there are challenges to be faced. Road safety is a particular concern for Mr Murphy. “We haven't invested in terms of policing to a large extent, and also over the years in infrastructure. The primary roads and motorways have a much better claims experience than the secondary roads. If you look at policing - the investment there in terms of reduction in the number of deaths - or in pure macro terms - would pay off so hugely.”
On the education front, Mr Murphy says there is a huge opportunity to introduce road safety to young people at transition year. Policy in these areas he suggests has been “too slow, too hesitant, and it's not integrated.”
As probably the only true composite insurer in Ireland, Allianz has a great interest in how the economy and business is performing. “In general what you are seeing is that Ireland has become more of a services economy and that's where a lot of the opportunity lies. Inward investment is still quite high, particularly in services and in the biochemical industry but we’re not investing enough in education in overall terms... Previous politicians had the foresight to introduce free education. Like everything in life you've got to be lucky with your timing but that move coincided with the information revolution so we had developed 'grey matter' at the right time ... we need that kind of vision again”.
In climate change, as in all things, the challenge is about strategy and managing risks.What is clear is that as we see measures taken to meet the Montreal emissions targets, we’re going to be hearing a lot more on the climate issue in the coming years. And only the foolhardy will trusting in luck.