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Market News

 July 13, 2006
Managing the risks of climate change

 Vancouver, Canada (GLOBE-Net) - "If current models are correct, Canada will have to deal with the inundation of low-lying lands on its seacoast, a shrinking Artic ice cap, reductions in Great Lakes water levels, permafrost thawing and reduced river flow on the prairies." These dire predictions are not those of an environmental activist. They come from Lord Levene, Chairman of Lloyds of London in an address to the Vancouver Board of Trade on July 11th. Levene added "We need to estimate the full costs of climate change and choose adaptation strategies -- now, before it is too late."

According to Lloyd's, the insurance industry must face up to the growing threat of climate change or risk being swept away. A recent Lloyd's report, 'Climate Change, Adapt or Bust', warns that insurers must act now to understand and actively manage risks from emerging threats such as greenhouse gases and rising sea levels. Scientific evidence confirms that climate change is happening faster than previously thought, and a change in insurance industry behaviour is long overdue.

Lord Levene's perspective on managing the risks associated with climate change is refreshing. Unlike other insurers who call for taxpayer-funded emergency pools for natural catastrophes, he noted, Lloyd's believes the vast majority of natural perils are insurable.

In his address to Vancouver's business leaders he observed that politicians, business leaders and insurers recognize that natural disasters are no longer simply natural disasters. "A disaster is either contained or fueled by hundreds of prior decisions taken at national and local levels concerning everything from building codes in high-risk zones to government relief planning."

As a consequence, it is possible to model the impact of natural disasters and climate change with some degree of accuracy, so that exposure can be managed and risk spread. Levene is confident that the global insurance market is well equipped to respond -- as long as it is free to price risk adequately, and constantly refines its risk models.

The Lloyd's perspective on climate change is echoed in the work of reinsurance giant Swiss Re. This company has been calculating the effect of climate change on its business for more than 10 years.

"Climate change is something we consider to be one of the most significant and emerging insurance risks that we face today," said Jacques Dubois, chairman and chief executive of Swiss Re America Holding Corp., during a plenary session at GLOBE 2006.

As a company that provides insurance to the insurance industry, Swiss Re is the "canary in the mine shaft with regards to climate change" because it does long-term risk analysis, said Chris Walker, managing director and head of sustainable business development at Swiss Re in an interview with Martin LaMonica, a staff Writer at CNET News.com.

"We do believe the climate is truly changing and that it could potentially disrupt how we do business, which is based on a predictive model," said Walker.

"Even if some cause-and-effect relationships are not fully established scientifically, we are a strong advocate of the precautionary principle," noted Dubois at GLOBE 2006.

The upside is that investors are flocking to technologies and other solutions that cut down on greenhouse gas emissions, notably carbon dioxide. Corporations that recognize the tangible risks and opportunities associated with climate change are adjusting the way in which they do business to accommodate the realities of a carbon-constrained future. The shift from fossil fuel based operations to those that rely more on renewable sources of energy ultimately will determine who wins or loses in terms of market competitiveness.

The most often cited example of a company focused on pursuing the business opportunities associated with a carbon-constrained future is General Electric. GE's 'Ecomagination' initiative is a deliberate attempt to capitalize on environmental problems, including climate changes, according to the company. GE is engaged in a wide range of green technologies, including solar and wind, water purification and energy efficiency.

Few corporations and fewer governments have looked at the full implications of climate change with as much clarity as GE, Lloyds or Swiss Re. As Lord Levene told his Vancouver audience "Governments, businesses and insurers must do more to understand and adapt to the implications of global warming. Climate change is real and the implications for my industry and your businesses must be understood - and quickly."

The lesson to be learned from these warnings is that climate change is a fact of life; it is unavoidable; and it could be very expensive if mitigation or adaptive measures are delayed. This lesson has implications not only in the corporate sector, but also with respect to government policy.

"Managing the risks of climate change should not be left to the insurance or re-insurance sector alone," notes Dr. John D. Wiebe, President and CEO of the GLOBE Foundation of Canada.

"The search for a 'Made in Canada' approach for dealing with climate change must not prolong uncertainty or delay the development of clean technologies that can help to reduce climate related risks," he added. "The fight to stem the impact of climate change can only be won when governments and business work together."