Market News

 August 25, 2006
Profiting from Climate Change Insurance

 Boston, USA (GLOBE-Net) -- A number of new and innovative insurance products and policies have been developed to help combat climate change, according to an assessment by environmental and insurance experts. They argue, however, that more needs to be done to encourage the widespread adoption of prevention solutions that will reduce climate-related losses for consumers, governments and insurers.


The report, From Risk to Opportunity: How Insurers Can Proactively and Profitably Manage Climate Change, was commissioned by the Ceres investment network to provide an overview of the business opportunities that are emerging for the insurance industry in response to climate change. The lead authors are: Evan Mills, Staff Scientist at the U.S. Department of Energy's Lawrence Berkeley National Laboratory and a co-leader of the Intergovernmental Panel on Climate Change (IPCC) Third Assessment Report's chapter on insurance; and Eugene Lecomte, President Emeritus of the Institute for Business and Home Safety and an insurance industry veteran.

Insurers today have a huge opportunity to profit while delivering loss-prevention benefits to society, the authors conclude. Insurance is the world's largest industry, and is uniquely positioned with experience in risk management to advance society's efforts to both mitigate and adapt to climate change.

Some of the most promising products identified include 'green coverage', which provides incentives for building owners who rebuild damaged property using sustainable building practices, and carbon emissions credit guarantees now offered by world-leaders Marsh and AIG, which encourage investors to participate in carbon-offset projects and emissions credit trading. A variety of insurance mechanisms can be provided to manage risks associated with carbon offset projects, the authors note.

Insurer-initiated engineering and construction improvements to prevent hurricane damage saved over $500 million in building losses from Hurricane Katrina, says the report; insurer FM Global says the savings came after customer investments of just $2.5 million, and helped make the company profitable during a year where claims reached record levels.

Other products include pay-as-you-drive premiums to encourage drivers to use their car less; mangrove-protection programs that are helping to reduce cyclone risks in Asia; and energy efficiency incentives that provide cost savings to allow favorable financing of projects.

However, despite the enormous potential of such progressive initiatives, most U.S. insurers have not yet experimented with new ideas, the report notes. No single insurer has developed a 'comprehensive portfolio of best-practice strategies' and investment in the area is thus far inadequate, the authors claim.

They note, however, that Hurricane Katrina and other costly insurance damage events in 2005 may have been the 'tipping-point' that will see a closer alignment of environmental science and risk management in the future. A growing number of insurers and financial business leaders are acknowledging that climate change is real and are calling for market-based solutions to address this new reality.

World famous financier Warren Buffet, GoldmanSachs Chairman Henry Paulson, and Jacques Dubois, Chairman and CEO of Swiss Re America Holding Corp. are among those who see climate change as one of the most important risks - and opportunities - facing business. "Climate change is something we consider to be one of the most significant and emerging insurance risks that we face today," said Dubois at GLOBE 2006.

Weather-related catastrophic losses for U.S. insurers have grown from around $1 billion per year in the 1970s to an average of $17 billion per year over the past decade, with $71 billion in losses in 2005 as the worst year on record.

In the wake of such a shift, insurers, as well as businesses that seek to manage their climate-related financial risks, must adapt and develop new and progressive policies to stay profitable.

Climate change could contribute to some of the most extensive property damage in human history. To meet this challenge and to minimize the associated risks, businesses are exploring new opportunities to use market principles to bring about needed changes. Just as carbon trading provides a financial incentive to cut greenhouse gas releases, loss-prevention methods and new insurance products can help businesses and individuals adapt for climate change and reduce emissions.

The private sector must be actively involved in global climate change efforts, along with governments and other parts of civil society, notes Dr. John Wiebe, President and CEO of the Vancouver-based GLOBE Foundation of Canada, and member of the UNEP Financial Initiative Panel that developed the UN Principles for Responsible Investment. By actively participating in the climate change process, businesses can develop strategies that will help them to retain their profitability, and society as a whole will benefit, he added.