Saturday 1/3/2008 Page: 68
The insurance industry has been an effective advocate for action on climate change over the past two decades. After all, there's no substitute for self-interest when it comes to promoting progressive policies. And the effect on insurers' hip pocket nerves of events like Hurricane Katrina, with its insured loss of $US66 billion, is certainly a powerful aid to concentrated thinking on the subject. Whatever the motivation, insurers and reinsurers such as Allianz. Munich Re and Swiss Re have led the way in developing models for assessing risk, formulating opportunities to benefit from climate change and generally acting as the canary in the cage.
But with the argument pretty much won and only a few renegade climate change sceptics ploughing an increasingly lonely furrow, the insurance industry needs to look beyond its advocacy role to start developing new policies and models for tackling the urgent challenges ahead. Allianz global board member Clement Booth says the emissions curve is trending upwards at such an alarming rate that the very financial fabric of underwriting risk is being called into question. "We are starting to get to a level where the ability to insure comes into question." Mr Booth's warning is echoed in an F&C: Asset Management report, which calls on insurers to more effectively factor the probability of future catastrophes into their risk pricing.
F&C Associate Director of Governance and Sustainable Investment Vicki Bakhshi says insurers face a stark choice. "Insurers are standing at a crossroads. If they don't act they are in real danger of becoming the victims of climate change, subject to ever-increasing risks in their investment portfolios and claims that exceed their projections." Mr Booth says there is no credible scientific evidence that climate change is not caused by human activity.
The Allianz research report "Hedging Climate Change" highlights the 15-fold increase in weather-related events over the past three decades. Looking at the 40 greatest catastrophes in recorded history in terms of insured losses, 85% occurred between 1988 and 2006, and 15% happened after the turn of the century. After 1989, annual damage has been less than $US10 billion only four times, and more than $US15 billion no fewer than 10 times. Of course, much of this is due to changing demographics. Improved living standards inevitably increase insured losses.
Perhaps the most frightening aspect of the otherwise welcome lift in Chinese and Indian living standards is the potential for the total damage bill to surge off the graph in those countries. The Allianz prediction of average annual total damages between $US80 billion and $US120 billion from 2010 to 2019 is based on a relatively conservative total loss to insured loss ratio of 2:1 or 3:1, which holds only for developed countries. As China rapidly industrialises and Chinese gross domestic product increases, the insured loss will skyrocket.
For example, in 1996 floods in China caused $US24 billion of damage, of which only $US500 million was covered by insurance - a ratio of 48:1. Fast forward only two years to 1998, and more flooding caused total losses of $US30 billion with insured losses of $US1 billion - a startling increase in insured losses to a ratio of 30:1. At the moment Beijing has a $2 billion exposure to earthquake risk. In Europe this would be $US20 billion and in Australia $US85 billion to $US100 billion, Mr Booth says.
Even in Australia, changing demographics have led to soaring exposure, says Marcus Winter, General Manager Non-Life at Munich Re Group in Australasia. "A hundred years ago hardly anybody would have noticed if a major storm hit the Gold Coast," Dr Winter told last October's NIBA Convention. The "sea change" trend has led to 700,000 exposed properties located within three kilometres of the coast and with an elevation of less than six metres. Small events such as the $100 million loss from hailstorms in Canberra last February barely cause a blip on the media radar. But if Sydney were inundated with a similar hailstorm featuring 14cm hail, the insured loss could reach $10 billion.
Allianz estimates annual global total losses of $US400 billion are not merely possible but probable. And the problem is data reliability, which insurers and reinsurers rely on to price risk appropriately and diversify their risks. The change in weather patterns means previous modelling is increasingly unreliable. "It is becoming more difficult to achieve diversification because we are dealing with a changing climate and historical data is less significant," Mr Booth said. "You don't know whether you are diversifying or accumulating risks." Drilling down into specific policies, climate change carries clear risks for liability insurance lines, including directors' and officers', environmental liability and professional indemnity, Dr Winter says.
"Failure to address climate change could lead to action against directors and officers." Perhaps this is why insurers are scrambling to prove their environmental credentials. IAG has produced a comprehensive 25-page sustainability report, Allianz is trumpeting its carbon offset policy discounts and its "most sustainable insurer" title on the Dow Jones Sustainability Index for the second year in a row, and Munich Re's Kyoto Multi Risk policy taps into the growing Clean Development Mechanism market resulting from the Kyoto Protocol.
And British insurer BGL Group has launched what it claims is Australia's first climate- friendly car insurance policy - carbon neutral car insurance via subsidiary Ibuyeco, underwritten by Auto & General Insurance. IAG and Suncorp are reportedly watching how well the product is received before launching competing insurance policies. Insurers are scrambling to get on board the post-Kyoto bandwagon by offering their risk and underwriting expertise for new technologies and frameworks such as emissions trading and wind power.
In the United Kingdom, the Association of British Insurers (ABI) has launched ClimateWise to provide a framework for global insurance companies to build climate change into their business operations. Insurers, brokers and reinsurers of the calibre of Lloyd's, QBE, Munich Re, Ace and Hiscox have come on board. Although financial instruments such as catastrophe bonds can help diversify risk, public-private partnerships are also vital to ensure future natural catastrophes can be covered.
But solutions shouldn't incorporate what Allianz calls "ex-post help" - a classic example of the "bolting horse" mentality in which governments fail to deal with mitigation and end up bailing out stricken citizens for problems largely of their own making. In its report, Allianz is mindful that state assistance involves considerable fiscal and political risks. It is unfair, as it is financed by taxation, and inefficient, as it provides a disincentive for citizens to obtain insurance. "It leads to a variation of the 'Samaritan dilemma' - state support after a disaster undermines the motivation of people who are potentially affected to carry out risk-reducing measures in advance of a possible catastrophe," the report said.
Flooding in the UK, despite ongoing arguments, provides a test case in how government can work with the private sector to ensure the continuity of insurance cover. "The example of Britain shows that flood risks are in fact insurable on the free market." Mr Booth says governments should be taking their responsibilities seriously. A large number of uninsureds and underinsureds constitutes a political issue. Late in 2005, the UK Government and the ABI agreed to extend their partnership whereby private insurers will continue offering insurance protection in areas with a probability of flood damage no greater than 1.3%.
In return, the Government agreed to five proposals:
- Reduce risks for 100,000 buildings over five years in endangered areas;
- Establish investment programs against climate change;
- Restrict new building in flood-prone areas;
- Make more accurate flooding information available;
- Minimise the risk of drain flooding and flash floods.
"I don't know why we have not tackled the issue of flood in this country, and why we continually allow our reputation to be dragged through the mud by the press when we have a large weather event." Mr Smith has put his money where his mouth is. Zurich promises to include flood cover automatically in commercial policies this year as part of its corporate responsibility program.
The emerging technology of carbon capture could do with a similar commitment from governments, says Head of Swiss Re's emerging risk management division No Menzinger. The urgency of the need to reduce emissions means governments cannot simply sit back and let the market come up with solutions. Without clear definitions and parameters from government, insurers cannot accurately calculate the risk involved.
"It means nothing short of having to change the entire energy mix," he said. "For example, there is no insurance cover for carbon capture storage. There's only a handful of pilot programs. This is still to be resolved on a global level." The Labor Government has adopted a wait-and-see approach to climate change. Its immediate adoption of the Kyoto Protocol was hailed as a new dawn in Australian policy at December's United Nations Climate Change Summit in Bali.
But the Government stared down the European Union over a draft proposal for short-term emissions reduction targets of 25-40% by 2020, compared with 1990. It preferred to wait for economist Ross Garnault to issue his report in June. Most analysts have hailed the Rudd Government's pragmatic approach as being in Australia's best interests, but the insurance industry needs to see substance on such pressing issues as flood mapping, building standards and sea defences. As Mr Booth says, climate change should outweigh all other considerations. "Climate change is the most important risk that we will ever have to manage in our business... it will be on the agenda for a long, long time."
0 comments:
Post a Comment