Climate change futures: health, ecological and economic dimensions

Industry observers point out that poor data and analysis
results in unacceptable costs to insurers, ranging
from incorrect pricing, excessive risk-taking, lost business,
eroded profitability, as well as regulatory and
reputation risks.
The Reinsurance Association of America has noted the
opportunity and imperative for integrated assessments
of climate change impacts, stating to its constituents, “It
is incumbent upon us to assimilate our knowledge of
the natural sciences with the actuarial sciences — in
our own self interest and in the public interest.” (Nutter
1996)
Increased collaboration between the insurance and climate-modeling
communities could significantly improve
the quality and applicability of data and risk analyses,
facilitating availability of insurance in regions where
the current lack of information is an obstacle to market
development. This potential is exemplified by a shift in
the industry towards accepting flood risks where they
previously had been viewed as uninsurable, a seachange
in the perspective of insurers regarding this
particular hazard (Swiss Re 2002b).
In the words of Andrew Dlugolecki, on behalf of the
Association of British Insurers (2004):
It is easy to portray climate change as a threat.
It certainly poses significant challenges to insurers.
But it also offers a range of opportunities, not just
in offering new products to meet customers' changing
needs, but in keeping the industry at the heart
of society, meeting community and national needs
whilst properly pursuing profit. Insurers will only be
able to provide risk transfer, investment and employment
opportunities so long as they are both solvent and
generating sufficient margin to invest in the future.
This puts a dual duty on insurers: to operate
profitably today and to prepare for the future.
SUMMARY OF FINANCIAL SECTOR MEASURES
I. Climate change is an opportunity for proactive risk management by the insurance industry.
Policies and measures:
• Create new products that increase incentives for behavioral change by business.
• Lobby for regulatory change necessary to reduce risks.
• Insurer participation in the establishment and enforcement of progressive building codes and land-use planning
guidelines:
o The insurance industry was responsible for the first building and fire codes in the US.
• Show industry leadership by expanding the assessment of climate change risks.
105 | FINANCIAL IMPLICATIONS
II. However, climate change may also lead insurers to exclude specific events or regions from coverage.
• Those who are emitting CO 2
are not those who are most affected by its results, making it difficult to directly link
behavior to premiums.
• New climate risks for health, agriculture, forests and the economy are not yet sufficiently valued to provide
specific coverage. Instead, these new risks may require insurers to raise prices or potentially exclude risks that
cannot be priced (although regulators have shown strong reluctance to allow this in some cases).
• Insurers in some cases are no longer able to predict future risk based on the past, given increasingly
unpredictable weather events and weather patterns.
III. Multi-faceted risks posed by climate change are a barrier to action, making it challenging to separate
and quantify its unique impact on human health.
• The process of climate change and its impacts on human health are interactive and complex, leading to multiple
direct and indirect effects for insurers and other businesses.
• Increased uncertainty is of particular concern to insurers.
• Spread of disease, natural disasters, drought, floods, desertification and deforestation are all increasing.