Lloyd’s: Insurers Must Adapt to Climate Change or Go Bust
12 June 2006
Lloyd’s of London has released a new report urging insurers to face up to the growing threat of climate change. The “360 Risk Project” report says that new weather patterns are changing insurers’s exposures, and they need to act now.
Sidestepping the issue of causality, Lloyd’s states that scientific evidence shows that global temperature, sea levels and rain fall are rising faster than previously thought. If the insurance industry wants to survive, it must adapt its responses to these trends sooner rather than later, says Lloyd’s.
That means investing both time and money in business-focused academic research which will help the industry come up with workable risk models—a key instrument for assessing risk exposure and therefore setting the right price, terms and conditions.
Lloyd’s says that the industry needs to stay ahead of the game by taking a new approach to underwriting, with pricing and capital allocation models regularly being updated to reflect the latest scientific evidence.
For example, current sea levels are higher in the Gulf of Mexico than in the past and, with sea temperatures rising, the industry must prepare for increased windstorm activity. It also means that US hurricane exposure will remain high and insurers need to plan for that. Risk modelling and pricing are key factors the sight of which the industry cannot afford to lose.
The models the industry has been using up until now may not adequately anticipate the pace of change. Thanks to scientific advances, underwriters can now take into account the increasingly reliable predictions which exist for the storm season immediately ahead, and factor these into their planning and pricing.
Although it’s almost two decades since the UN recognized that climate change was a catastrophic threat to earth, it’s clear that the insurance industry has not taken catastrophe trends seriously enough. As an industry we must work together to understand and manage these new risks, and to change our behaviour.
Today’s risk environment is changing and evolving—more rapidly than ever before. So at Lloyd’s, understanding and anticipating major risk trends is at the heart of all we do. Climate change is today’s problem, not tomorrow’s. If we don’t take action now to understand the changing nature of our planet and its impact, our industry will face extinction.—Rolf Tolle, Lloyd’s Director, Franchise Performance
The report also says that the industry needs to figure out how to work in partnership with governments and businesses to look for practical solutions to help society adapt to climate change. Such partnerships would help to mitigate risks such as the number of people living on coastlines, and kickstart work to reduce CO2 emissions.
And although most natural perils are insurable “as long as the market is free to price risk adequately,” Lloyd’s warns that long-term insurability of weather-related risk is by no means guaranteed because climate change is developing much faster than initially thought.
Lloyd’s is the world’s leading insurance market providing specialist insurance services to businesses in more than 200 countries and territories.
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