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BRUSSELS, Belgium-When it comes to dealing most effectively with a likely future increase in climate-related property losses, insurers need to adopt a more active role, particularly in dealing with a wide variety of groups and policymakers, an insurance executive says.
Andrew Dlugolecki, group assistant general manager-underwriting for Perth, Scotland-based General Accident P.L.C. and a specialist in environmental issues, predicted that "in the future, we'll see more cooperation between the private and public sectors" in the area of climate-related disaster limitation.
Gerhard Berz, head of geoscience research at Munich Re Group, issued a similar message. He told delegates at conference last week, called "The Impact of Climate Change on Business and Industry," that the insurance industry can protect itself adequately against the effects of climate change if it has "its clients and the authorities as useful partners on its side."
Insurers' power lies in their ability to alter deductibles, to exclude certain perils or risk areas from coverage, or to severely restrict the scope of coverage, thus pressuring authorities to take measures to reduce risks, to tackle the cause of losses or even to transfer risk to the government, Mr. Berz said.
Mr. Dlugolecki said insurers need to improve cooperation with two key groups.
One is governments and their various departments, where insurers can use their influence to resist new development in high-risk areas, to protect existing developments in such areas and use loss control experience to help property owners prevent losses.
The other group is the construction industry, where insurers should be influential regarding methods, standards and regulation of construction.
The insurance sector also can help the authorities improve the response to property damage from extreme weather events by providing information on the costliest types of weather hazards, advice on vulnerable construction design and disaster recovery services, Mr. Dlugolecki added.
Other steps the insurance industry should take include assisting research into weather patterns and monitoring new findings constantly, identifying the key hazards likely to cost the most damage and then working with those concerned to minimize those hazards as much as possible.
Mr. Dlugolecki and other speakers at the conference highlighted the importance of looking for options that would have positive net benefits even if they may be more costly to implement, such as using solar power instead of coal-generated electricity. In particular, this could include greater use of alternative power sources, including wind or waves, as a possible long-term option.
While acknowledging the controversy over whether insurers ought to lobby for government control of other industries whose products are believed to cause climate change, Mr. Dlugolecki said, "I believe it is very valuable to place before the policymakers the current vulnerability of society to extreme events, so that they are aware of the economic implications and can begin to appreciate the potential for even greater losses if the dice roll badly."
Mr. Dlugolecki said an international agency should be created to address the insurers' concerns. Currently, the only such organization is the United Nations Environment Program initiative for the insurance industry on sustainable development and the environment, of which he was a founding member in 1995. By giving the insurance industry its own international voice on climate change and other environmental issues, the UNEP initiative enables them to "help policymakers to discover appropriate solutions to cope with the financial challenges" these problem areas present, he said.
Mr. Berz warned that insurers' present climate-related problems will be "dramatically aggravated" if scientific predictions on the greenhouse effect come true.
"The increasing intensity of the convective processes in the atmosphere will possibly force up the frequency and severity of cyclones, tornadoes, hailstorms, floods and storm surges in many parts of the world with serious consequences for all types of property insurance," he stated.
Under such circumstances, insurance rates would have to be raised, and in certain coastal areas or flood plains, insurance coverage would be available only after considerable restrictions had been imposed, such as significant deductibles or low liability or loss limits, he warned.
Furthermore, in areas of high insurance density, the loss potential of individual catastrophes could reach a level at which the insurance industry would run into serious capacity problems, Mr. Berz added.
He warned that based on loss data showing a dramatic rise in catastrophe losses in the past few years, it is possible that by the end of the decade, average annual losses from "great" natural disasters could rise to $30 billion to $50 billion, in today's values. The remaining natural loss events, not categorized as great, would at least double the overall loss volume, added Mr. Berz.
Climate change will lead to natural disasters "of unprecedented severity and frequency," causing capacity problems that would be much more serious than those of the past few years, Mr. Berz warned.
"The whole future of this class of business in certain regions could be at stake if the development of this problem is misjudged," he added.
Like other conference speakers, Mr. Berz highlighted the considerable uncertainties surrounding scientific evidence related to climate change.
However, the real issue is "whether the climate data and computer climate models can provide enough information to allow sufficient time to assess future changes and develop the appropriate adjustment and preventive strategies," he said.
Mr. Berz claimed that while the uncertainties mean any strategies adopted should be flexible enough to be adjusted for any changes in circumstances, the "no regret" strategies, such as reducing car fuel consumption or a reduction of energy consumption generally, are successful from the outset. Even if the relevance of climate is lower than expected, such policies at least demonstrate to the Third World the industrialized countries' sense of responsibility, he said.