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LONDON -- A predicted rise in average U.K. temperatures over the next century might mean more weather-related losses for insurers, according to scientific forecasts.
Higher temperatures also could bring new insurance products, a reinsurance broker executive says.
Average temperatures in the United Kingdom could rise by up to three degrees Celsius over the next century, increasing the risk of rising sea levels, severe flooding, winter gales and other extreme climatic events, according to the forecasts.
The U.K. Climate Impacts Programme this month released a range of future climate change scenarios for the United Kingdom.
The scenarios, based on computer modeling of projected greenhouse gas emissions, predict U.K. warming rates of between 0.16 degrees Celsius and 0.35 degrees Celsius per decade for the next hundred years, coupled with average sea level increases ranging from two centimeters per decade to 10 centimeters per decade.
The UKCIP concentrates most of its analysis on a "medium-high" projection, with associated increases in coastal flooding and erosion, severe winter gales, winter and autumn rainfall, and hotter and drier summers.
For example, under the medium-high scenario, a summer as hot as 1997 -- the second hottest August on record in the United Kingdom -- could occur four times a decade by the 2080s, according to the UKCIP researchers.
"These scenarios illustrate the very real threat that climate change represents to us in the U.K.," said Michael Meacher, U.K. Environment Minister.
The UKCIP, a government-funded research organization based at Oxford University, was established in 1997. Its purpose is to help private and public U.K. enterprises to assess their vulnerability to, and develop plans to cope with, future climate change. Those enterprises could include insurance companies, water and forestry authorities, developers and farmers.
The UKCIP researchers say the insurance and construction industries face the greatest potential losses from the forecasted climate scenarios.
The Assn. of British Insurers has not made an official response to the climate forecasts. However, an ABI spokesman said the association and its members will look carefully at the research.
"There is still a lot of speculation about what may happen in the future, but we will take this on board," he said.
Oliver Peterken, executive director-research and development for reinsurance broker Willis Faber Re in London, agrees there is still a lot of uncertainty about future climate change. Nevertheless, he said, the UKCIP forecasts are very significant for the U.K. insurance industry.
"This is the first time that reputable scientists have said these are the possible impacts of climate change on the U.K.," he said. "Before, we have only had very general studies about how the weather may change. It has not been clear what the impacts may be."
Mr. Peterken said there is still the need for a lot more research on climate change impacts. "The next five years or so should be very interesting," he said.
Mr. Peterken suggests insurers take a long-term approach to the issue of climate change. He said he does not believe there is any need for insurers to review their catastrophe reserves in light of the new forecasts.
However, Mr. Peterken did suggest brokers and insurers review their catastrophe models to ensure they take into account the latest climate change forecasts.
He said the UKCIP forecasts also should lead to serious government thinking about sea defenses.
A recent report by the World Wide Fund for Nature U.K., part of the international conservation organization, supports the UKCIP forecasts by warning that sea levels in parts of eastern and southern England are rising by six millimeters a year.
The WWFN report also warns about the state of U.K. sea defenses.
"Construction and repair work along 1,800 kilometers (1,116 miles) of sea walls and other coastal defenses is not keeping up," the report said.
"Most of the defenses were built or raised in the aftermath of the catastrophic east coast floods of 1953. Now those walls are crumbling."
The ABI spokesman said the U.K. insurance industry is very concerned about the risk that rising sea levels pose to coastal properties. He said the ABI is working on a project with the U.K. Environment Agency, which has responsibility for maintaining sea defenses, to assess the current state of all U.K. sea defense systems.
Mr. Peterken said it is important to recognize the UKCIP forecasts have the potential to create for insurers not only catastrophic losses, such as flooding and windstorm damage, but also attritional losses.
He said subsidence damage, caused by drying, shrinking soils cracking building foundations, is insurers' main potential attritional loss exposure resulting from a warmer climate.
The ABI and the UKCIP have started discussions to develop a detailed study on the potential impact of climate change on subsidence losses, according to the ABI spokesman.
Mr. Peterken said he believes climate change is an opportunity for the insurance industry to develop new, innovative products.
For example, the UKCIP forecast of warmer weather is not good news for energy companies, as there will be less demand for heating, he said.
Willis Faber Re is one of several companies in the process of developing "weather derivative" products designed to help companies, such as energy providers, that would suffer lost revenues from warmer weather.
Under Willis Faber Re's proposal, which would be conducted through a linked capital market transaction, companies could "swap" their contrasting weather exposures, Mr. Peterken said.
For example, a soft-drink company whose revenues are highest when the weather is warm could swap its weather exposure with an energy company that has its highest revenues during cold periods.
Basically, such transactions would allow companies with contrasting weather exposures to insure, through a linked capital market bond, against lost revenues from adverse weather conditions.
Mr. Peterken said such transactions are still at the developmental stage but could be driven by increased awareness of the potential impacts of climate change.
In 1997, Worldwide Weather Trading Co. unveiled a "weather hedge" to companies facing the risk of financial losses from climate changes (BI, Dec. 1, 1997).
A summary report of the UKCIP forecasts is available free from the U.K. Climate Impacts Programme Environmental Change Unit, 1a Mansfield Road, Oxford OX1 3TB U.K.; 44-1865-281188; fax: 44-1865-281192.