Extreme weather is a reality – the insurance industry must adapt
The atmosphere is heating up and becoming more humid, we can say this with great certainty. This is likely to lead to an increase in extreme weather and more flooding. Recent major catastrophes are entirely consistent with this. Climate change might not cause such events – but it can make them much worse.
Since 1980, the cost of natural catastrophes has grown by $870bn in real terms and 2011 was the second costliest year on record for natural catastrophes including devastating floods in Thailand and Australia. Sea levels are rising, most probably at an accelerating rate, and this surely made the impact of Superstorm Sandy worse than it might otherwise have been.
Despite the backdrop of financial crises the long-term impacts to society are potentially too dangerous to ignore. It is critical that economies begin to confront and adapt to the changes that are already underway, while agreeing to internationally binding carbon reduction targets.
Yet the responsibility does not lie with governments alone. Unless businesses take a leading role in adjusting to our new future and adapting to the effects of further climate change then the costs, both financial and otherwise, will continue to grow.
From my own vantage point within the insurance industry, I can see three ways in which we can achieve this.
All industries need to take significant steps towards managing the climate impacts of the companies we run and the work we carry out. In some industries, including our own, progress is being made and programmes are in place to help reduce the environmental impact. ClimateWise, a partnership of insurers, brokers and risk modellers, includes more than 40 insurance companies and organisations globally that are working together to reduce the risks of climate change.
The ClimateWise mission is to promote best practice, and to date this has already resulted in significant advances in modelling the risks of climate change impact, increasing the incorporation of climate change into member investment decisions, developing an approach for considering climate change as a systematic risk in asset management strategies affecting capital allocation, and moving towards top-level responsibility for company sustainability.
One of the key challenges for ClimateWise is overcoming the inherent short-termism of business decision-making; embedding sustainable practices at the heart of business necessitates goal-orientation on much longer terms and this can be very difficult within the existing decision frameworks of many businesses.
A good example of success, however, is ClimateWise member Tokio Marine, based in Japan, which has restored 8,200 hectares of mangrove forests in the coastal areas of seven countries, citing joint mitigation-adaptation benefits of carbon sequestration (contributing to its own carbon neutrality since 2008) and enhanced resilience to storm damage. It is imperative that similar programmes are established more widely.
Secondly, when disasters do happen, we must ensure that damage is repaired in a way that increases the sustainability of communities in the future, and it is at the claims stage that we are well positioned as an industry to do this. However this can be more expensive than traditional rebuilding and in a competitive marketplace it can only be offered as an option. A requirement for sustainability through building codes would level the playing field and enable material action. When best practice is applied, energy emissions for such work can be cut by up to 92% and the duration of repair work cut from 159 days to as low as 51 days.
Finally, the insurance industry must continue to innovate in order to match the needs of individuals and businesses in reducing the effects of climate change. New products and services that drive changes in consumer behaviour such as innovative renewable energy project insurance and green-buildings insurance are already doing that to an extent. Developing and tailoring products and services in a growing number of regions around the world will also be imperative in allowing individual companies to avoid huge losses from single climate events to ensure that the risk and losses from natural disasters – such as Superstorm Sandy – are spread across the globe by insurance and reinsurance.
None of this should overshadow attempts to halt climate change altogether, the reduction of carbon dioxide emissions is a global priority. But extreme weather is already a reality, and unless we can find a way to adapt to the effects of the changes which have already taken place and those unavoidable changes to come, people, businesses and governments will continue to feel the impact of this growing level of risk.
Trevor Maynard is head of exposure management and reinsurance at Lloyd's of London
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