Lloyd’s of London: Insurers must adapt to climate change
By John Nelson, chairman of Lloyd’s of London
11 May 2014 (theguardian.com) – There is no doubt the climate is changing. Each of the past three decades has been warmer than the previous one, and the vast majority of scientific evidence points to this being caused by mankind’s reliance on carbon-based fossil fuels. While understanding weather patterns and the risks associated with major weather events has always been critical to the insurance industry, climate change has recently brought the need for better modelling of future weather into sharp focus. According to the World Bank, weather-related losses and damage have risen from an annual average of about $50bn in the 1980s to close to $200bn. Lloyd’s knows this all too well, the damage wrought on the US by the hurricanes Katrina, Rita, and Wilma in 2005 and Superstorm Sandy in 2012 to name but a few all brought significant claims to the insurance market. Many types of business we insure are affected by climate change. There are the obvious ones such as property, catastrophe and crop insurance. But Superstorm Sandy taught us that the reach of extreme weather is far greater than that. The destruction Sandy brought to the eastern US seaboard was responsible for claims of up to $300m in lost fine art, a consequence of the many expensive US beachfront homes damaged. Modelling has shown that the approximate 20cm of sea-level rise at the southern tip of Manhattan Island increased Sandy’s surge losses by 30% in New York alone. As a response, our recent Catastrophe Modelling and Climate Change report calls for the insurance industry to take seriously the impact of climate change and the implications it poses for the industry. The first step has to be making sure that catastrophe models can properly account for climate change. This will be challenging. Uncertainties associated with the estimation of the extent and frequency of the most extreme events can make assessing future impacts difficult within traditional modelling. Consequently, this will require investigation into new modelling approaches that build in forward projection, not just historical data. In developed and developing economies alike, there is a need to better understand the impacts of climate change and the responsibility doesn’t lie exclusively with the private sector. The development of more accurate catastrophe modelling which takes into account the implications of climate change will create an opportunity that governments must seize. By using these innovations in modelling to deliver better environmental, housing and wider land use policy, governments can protects their citizens from the worst effects of changing climates. Insurers also have an important role to play in mitigating the impact of the changes in climate which have already occurred, through closer coordination with other industries, notably construction. There need to be policies to drive up standards and make sure we have resilient homes, that we use better materials. All these and strong forward planning will be key to this effort. Here, too, governments must play their role in enshrining standards in legislation. Change will touch all of us. I firmly believe that understanding and incorporating climate change into future modelling has become essential for anyone making long-term financial commitments, be that investing in infrastructure, housing or indeed policy. Ultimately, insurance exists to pick up the pieces and pay the claims when the likes of a Hurricane Katrina or a Superstorm Sandy strike. But to continue to do this, as Lloyd’s has done since 1688, insurers must factor climate change into modelling, and develop the tools we need to understand and evaluate its impact.
