Lloyd's has urged the insurance industry to act now or face the risks associated with climate change.
As part of Lloyd’s new ‘360 Risk Project’, which aims to generate debate on key industry issues, it has released a new report urging insurers to face up to the growing threat of climate change.
Fact: Last year, natural catastrophes killed 97,000 people and cost the insurance industry $83 billion – more than ever before.
With new weather patterns, exposures are changing and insurers need to act now, says the new Lloyd’s report Climate Change: Adapt or Bust.
Despite debates around the causes and effects of climate change, scientific evidence shows that global temperature, sea levels and rain fall are rising faster than previously thought. And, if the 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.
At the moment, the industry is lagging behind. The fact that no-one has an accurate picture of the financial impact climate change could have on the industry is a clear indication that more needs to be done.
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 which the industry cannot afford to lose sight of.
Over the past few years, insurers have battled with record hurricane seasons, a trend that is expected to continue. These changes mean that long term historical data should not be the only tool that underwriters use. As forecasting becomes more precise, underwriters should be able to respond to the scientific predictions of each season ahead.
Rolf Tolle, Lloyd’s Director, Franchise Performance said: “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.”
He added: “Although it’s almost two decades since the UN recognised 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.”
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.
The message is clear, and is right there in the title – Adapt or Bust. As the report says in its introduction: “Climate change is likely to bring us all an even more uncertain future. If we do not take action now to understand the risks and their impact, the changing climate could kill us.”
About the 360 Risk Project
The aim of the Lloyd’s 360 Risk Project is to generate discussion and debate on how to manage risk in today’s environment. This is a major issue – and one that will not be addressed easily or quickly. That is why the Lloyd’s 360 Risk Project is a long-term initiative addressing different aspects and elements of risk across a range of issues.
The first series is all about catastrophe trends - an issue that concerns not just the insurance industry but everyone with an interest in the future of our planet. This series will run over the coming months and as it evolves we hope to understand more about catastrophe trends and what the insurance industry and indeed the wider business world and society can do to cope with catastrophes.
Future series of the 360 Risk Project will address similar important and wide-ranging issues. But, as the 360 Risk Project is all about creating discussion and debate, we want your views on what topics we should be addressing. Send us your ideas on what should be on the agenda by emailing us at 360@lloyds.com
