Storms, floods and fire cause havoc to lives and property. Just ask those Europeans flooded out of their homes during the past two years, or the Australians affected by the bush fires which scorched the edges of Sydney in January.
Over the past decade some of the world’s biggest insurance and reinsurance companies, most notably Munich Re and Swiss Re, have been putting a figure on the damage wrought by natural catastrophes. They have also heeded the scientists’ warnings that the number of disasters will increase, and have been trying to put a figure on what future losses may turn out to be.
These figures should, by now, be familiar. Munich Re believes that the economic cost of disasters induced by climate change will increase 10-fold over the next 50 years, from $30bn a year today, to $300bn a year by 2050. “Clients, insurers and reinsurers have to take into account the unthinkable. According to our estimates, extreme losses from natural disasters can be even higher than the insured losses from September 11,” said Munich Re board member Wolf Otto Bauer.
What then, is the industry doing about it? Since 91% of last year’s insured natural disaster losses were related to storms or floods, it has started by asking governments to develop more coherent flood and storm defence strategies.
In the UK, this has involved a three-pronged political attack. Andrew Dlugolecki, formerly of CGNU and currently a research fellow at East Anglia University, says that, since the floods of autumn 2000, UK insurers have been putting considerable pressure on the government to clear the backlog of work on flood and storm defence.
Weaknesses in planning procedures and building standards have been highlighted. Insurers complain that the government is still giving the go-ahead for new housing developments in flood plains and allowing new homes to be built with materials that will not withstand future weather conditions.
UK insurers are also trying to revoke their status of ‘the most generous property insurers in the world’. In a 1960’s agreement with the government, insurers consented to fixed price flood insurance for all buildings insurance policies. In an era of more homes, more private ownership and rapidly increasing property prices, this condition is proving to be something of a ball and chain. No other country has such generous conditions. In the US, for example, flood protection requires a separate insurance policy.
On a more practical level, the industry has been repairing buildings damaged by the autumn 2000 floods in a more flood-resistant way. This can be relatively straightforward. If a building’s electrical systems were blown by a basement flood, the new systems are put in halfway up the basement and not, as traditionally done, at the bottom.
Inevitably, premiums and insurance exclusions have had to rise. Insurers point out that they exist to protect against the unforeseen, and that for some homes annual flooding now appears more like a dead certainty. Existing customers get the best treatment, although they may see an increase in the excess they have to pay, or may have to live with certain rooms excluded from cover. New customers can expect harsher conditions, and commercial customers the harshest of all. “Our commercial customers exist to make money, just like we do,” says one property underwriter. “So they can’t expect special treatment.
The chief problem with this premium increase approach is that without better actuarial forecasting it is hard to achieve accuracy and fairness. If insurers cannot be accurate and fair, especially when dealing with private home owners, they could find themselves a target for pressure group action.
Pressure on investors
Tony Juniper, policy and campaigns director at Friends of the Earth UK (FoE) goes further. “Insurers are knowingly adding to the problem of climate change by insuring polluting industries such as the car and energy industries. This insurance enables such industries to continue their destructive activities. If, when losses become too high, insurers just refuse cover or hike the price up, they will be punishing the victims, not the perpetrators, and will be accused of unethical corporate behaviour. They can’t compound the problem and then just hand it over to the government and public.
Many insurers think this approach is unfair., saying they cannot and should not be the world’s environment and investment policemen. To an extent, FoE’s Juniper would agree. “A fundamental shift from carbon to renewables is required. Insurers and the financial markets are only part of the equation; they can’t be expected to do all the work.
The environmentalists’ approach starts to make more sense when you consider that insurers and pension fund managers control one third of global stock markets. In short, they own companies and can exert considerable pressure on them, nudging them away from carbon economy investments.
The socially responsible investment (SRI) sector has been using this line of argument for several years. “Investment is the economic bridge between the present and the future, and fund managers play a considerable gatekeeper role in terms of directing capital towards alternative investment options,” says Nick Robins, head of SRI research at Henderson Global Investors. “Currently, however, most investment is entrenching existing carbon-intensive patterns of global growth and development. Climate change thus poses systemic challenges for the investment chain, with potentially significant consequences for the risks and returns that investors will face. As a result, our SRI team is extending its existing investment strategy of seeking out ‘industry of the future’ companies that are enabling the transition to a low carbon world and excluding those companies that are evading their climate responsibilities.
The SRI sector has been growing exponentially for some time now and shows no sign of stopping. Many insurers have converted to the SRI approach and pension funds are being moved wholesale into the SRI sector. The banking and finance sector is also factoring SRI concerns into its loan decisions. As more and more institutions climb on board, the noose will tighten around companies which refuse to be more climate-friendly.
The beauty of the SRI approach is that it does not automatically exclude any company or industry. It just encourages companies to mend their ways by using the carrot of investment or the stick of divestment. Nevertheless, certain industries are more at risk of divestment than others.
In the firing line
Energy companies remain top of the risk list. This is not just because they provide energy by burning fossil fuels and releasing greenhouse gases (GHGs) either – although this is obviously a fundamental issue. Due to their sheer size, energy companies are huge consumers of energy. BP’s global operations produce more greenhouse gases than Greece.
To become a candidate for SRI investment, an energy company would have to invest heavily in renewable energy and reduce its own energy consumption. Of all the oil companies, BP is making the biggest investments in clean energy. It is also committed to reducing its energy consumption by 10% by 2010. It is seen as being ahead of its rivals and is often included in SRI funds.
Construction, car and airline companies are also at risk. All must reduce their energy consumption. The construction industry needs to focus on energy efficient buildings where good insulation, solar panels, rainwater harvesting systems and triple glazing are the norm. The car and airline industries must find a way to run vehicles on clean fuel. Both industries need to find a way of recycling the resources locked up in end-of-life cars and aircraft.
These industries are at greatest risk of divestment, but all companies will come under increased environmental scrutiny and will need to curb energy consumption and encourage environmental responsibility along their supply chains. As the case of Nike showed, companies are finding it harder to hide behind convoluted production and ownership relationships.
Climate change is an investment issue, not a property underwriting one. No amount of premium tweaking will jump start moves towards a renewable energy economy. It is more likely to exclude customers and make it difficult for insurers to find new business. Up to 80% of economic losses from recent natural disasters occurred in the currently largely uninsured developing world, so insurers were off the hook. But as we reach insurance saturation in the West, insurers will need to look to the developing world for new clients.
Only investment decisions can jump start a renewable economy and, as controllers of one-third of the world’s investments, insurers hold the key to many of these decisions. If insurers don’t start wielding their investment power they will be building up underwriting and loss-management problems for themselves in the not too distant future.
Jessica McCallin is a freelance journalist
GLOBAL WARNING
A report released by insurers on the eve of the 21st session of the United Nations Environment Programme’s (UNEP) Governing Council last year predicted that losses due to more frequent tropical cyclones, loss of land as a result of rising sea levels and damage to fish stocks, agriculture and water supplies, could cost $304.2bn annually. Dr Gerhard Berz, head of Munich Re’s Geoscience Research group, said that there was reason to fear that climate change will lead to natural catastrophes of hitherto unknown force and frequency. “Studies have indicated, disturbingly, that climatic changes could trigger worldwide losses totalling many hundreds of billions of dollars per year.
The report assumed that carbon dioxide concentrations will rise to twice pre-industrial levels by 2050. In the US, it was estimated that the extra costs of health-related measures and more intensive water management may reach nearly $30bn a year by the same year.
The latest Intergovernmental Panel on Climate Change report, jointly sponsored by UNEP and the World Meteorological Organisation, has underscored the need for swift action. Scientists believe that average temperatures across the world could climb by between 1.4 and 5.8 degrees over the century. Studies also show that cities with over 10 million people, appear to develop their own weather patterns with more thunderstorms, and hailstorms.
THE ACTIVISTS’ VIEW
According to Greenpeace, the latest science confirms what most have suspected all along: that the threat of climate change is even worse than was previously thought. Public opinion polls around the world show overwhelming public support for positive action to combat climate change.
The Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) was initially designed to reduce greenhouse gas emissions from industrialised countries by 5%. By the end of the Bonn negotiations last July, its effectiveness had been substantially weakened. Following President George Bush’s announcement last year that the US was abandoning the Kyoto Protocol, Greenpeace offices worldwide are focusing on the top five US oil companies that they say helped to put Bush in power and are the main drivers of Bush’s anti-climate policy - Exxon/Mobil, Chevron, Texaco, Conoco and Phillips.
STORMS AHEAD?
Both Munich Re and Swiss Re say that storms in Europe are still an underestimated risk despite the severe gales, Anatol, Lothar and Martin, in December 1999, which caused insured losses exceeding e 10bn. Munich Re says that the losses reflect the enormous concentration of values and the high insurance density in Europe. Its latest publication Winter storms in Europe (II) - Analysis of 1999 losses - Loss potentials considers the influence of global warming on the occurrence probability of extreme wind speeds in Europe. www.munichre.com
ENVIRONMENTAL AGENCIES
The US Environmental Protection Agency says that rising global temperatures are expected to raise sea level, and change precipitation and other local climate conditions. Changing regional climate could alter forests, crop yields, and water supplies. It could also affect human health, animals, and many types of ecosystems. Most of the US is expected to warm, although sulphates may limit warming in some areas. Scientists are currently unable to determine which parts of the US will become wetter or drier, but there is likely to be an overall trend toward increased precipitation and evaporation, more intense rainstorms, and drier soils.
The UK Environment Agency warned last year that climate change, along with the extremes in weather that it brings, is causing serious problems. Environment Agency spokesperson Jo Hunt explained that floods and drought are both effects of climate change. Writing in the Environment Agency’s Environment Change Journal, Ian Christie, senior research associate at the think tank Demos, said that a global increase in extreme and unpredictable weather would mean major economic and social disruption, as well as environmental damage. “Many landscapes would be changed in ways that wreck the economies linked to them - most obviously, the skiing industry in Alpine Europe. Many other regions could be wiped out if snow cover is hugely reduced in a warmer world.
“Southern Europe could warm significantly over the next 50 years, with extreme summer heat in countries such as Greece, and an increase in the spread of deserts, forest fires, sea level rises and water shortages around the Mediterranean. Northern Europe, meanwhile, could see warmer winters, increased rainfall and flood risks, and hotter summers.”
