From its origins in the coffee houses of London during the late seventeenth century until now, the modern insurance industry has always been affected by the vagaries of the weather. The Lutine Bell traditionally rang out in the Lloyd’s Building in London to alert underwriters to impending bad news like the sinking of a merchantman with an insured cargo during a storm.
Nowadays, the weather impacts insurance companies in two distinct ways. First, there are the claims. Worldwide damage and weather-related-losses have increased from an annual average of $50bn in the 1980’s to nearly $200bn this decade according to figures recently released by the World Bank. Secondly, there is the physical effect on the investments held by insurance companies from extreme weather events as well as the impact of new carbon regulations and disclosure rules on their portfolios.
That’s why the Chairman of Lloyd’s, John Nelson, has said that understanding and incorporating climate change into future modelling has become essential for anybody making long-term financial commitments, be that investing in infrastructure & housing or making public policy. So how has the industry been addressing the problem since Hurricane Sandy devastated parts of the north eastern seaboard of the United States in 2012?
Initially, it didn’t do much. A report by advocacy group Ceres in 2014 ranked the largest 330 insurance companies with a presence in the United States by what they said they were doing to address the problem. The most pro-active among them were ACE, Munich Re, Swiss Re, Allianz, Prudential, XL Group, the Hartford, Sompo Japan & Zurich. By contrast health & life and annuity providers, which between them hold two thirds of the industry’s overall investments, ranked poorly.
However, since then the intervention of the SEC in America and the Prudential Regulatory Authority in the UK has pushed climate change higher up the agenda and led to greater disclosure in general. To give some examples, brokers are now including new “green clauses” in buildings’ policies which specify types of materials and design. Climate risk management advice is being given to companies on their supply chains. And health, life & annuity providers are increasingly defining environmental as well as social & governance criteria in their investment mandates.
“The rating agencies are now insisting on robust asset/liability management capable of mitigating the double exposure of their clients to both claims and investments. As the Washington insurance commissioner, Mike Kriedler, said recently: “This is not just a partisan issue, it’s about financial solvency as well as consumer protection.” But although for many the debate appears to have moved on, there remain some for whom it has not. The American Coalition for Clean Coal Electricity recently criticised the peer-reviewed, 840-page national climate assessment report as “full of unsubstantiated tactics & hyperbole.”