May 29th, 2009

Climate Change, Part V: (Re)insurers Remain Vigilant

Posted at 1:00 AM ET

klein_chris_bioChristopher Klein, Head of Global Business Intelligence

Whether or not you have taken a stance on climate change, the fact remains that this issue will persist in public forum debate and continue to present various risks for the (re)insurance industry. But in addition to factoring potential storm increases into modeling and understanding the possible liabilities that may arise, carriers need to keep abreast of how the debate — and the data — develop.

Changing Risks and Evaluation Methods

The very uncertainty of climate change defines the weight of its potential risk, and the importance of awareness on behalf of the (re)insurance industry.

The potential for highly correlated losses as well as the unknowns of climate change makes modeling more complex. Results from scientists and researchers bring to light new considerations on a regular basis — whether concerning a new scope of severity or the possibility of paradoxical cooling periods. These findings, in turn, will need to be examined for validity and applicability to risk assessment methodologies.

As carriers have developed more accurate models and clarified the assumptions in them, debate has stirred over the accuracy of new methodologies and the data used. Still, further modeling method refinement continues, including developing a better understanding of outliers to create more compelling and accurate predictions, using new sets of data relevant to the climate change debate, and incorporating assumptions about regulatory policies.

Recognizing the Risk and Rewards

At the same time that (re)insurers are working to establish more accurate estimations of the catastrophe and liability risks of climate change and more efficient ways to manage those, they must constantly mold their efforts to adapt to domestic and international climate change policy. Carbon cap-and-trade or tax legislation, disclosure requirements (for (re)insurers and policyholders), and similar regulations both home and abroad will change how carriers write business and manage their own business risk.

Still, there remains the potential for profit as well. The seemingly inevitable trend toward products, businesses, and services that aim to address climate change offers the opportunity for (re)insurance industry growth. Regulatory bodies are looking not only at restrictions, but also policies that promote innovation and deployment of low-carbon technologies and remove barriers to energy efficiency. Incentives to support such initiatives could provide additional benefits for (re)insurers that develop products that address the potential risks of changes to climate patterns as well as serve the burgeoning industry set to serve carbon-conscious needs.

The (re)insurance industry has thus far done well in its adjustment of risk assessment to account for the probability of climate change and its potential widespread consequences on a range of business lines. But the forecasts of potential damage and range of affected areas of life and business are constantly revised. And governments around the world are in various stages of structuring and enacting carbon-based regulations. Vigilance to the development of the highly contested debate remains vital. By doing so and seeking to incorporate the climate change numbers into modeling assumptions and remaining aware of developments in the debate, carriers strengthen their chances of simultaneously growing their businesses and weathering the climate change storm of potential loss and liability.

Read Climate Change, Part I: A Contested Point You Need to Understand >>

Read Climate Change, Part II: What a Warmer World Could Mean >>

Read Climate Change, Part III: Liabilities Heating Up >>

Read Climate Change, Part IV: (Re)insurnace Industry Response >>

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