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Climate change may present a real business risk for insurers, but insurance buyers should be prepared to ask hard questions when in comes to talk of coverage and price. Stuart Collins asks if uncertainty could lead to scientific evidence being selectively used to client's detriment.
Listening to the radio while getting on with some long overdue home decorating a couple of weeks ago, my attention was drawn to an item on flooding in England and in particular the comments of a spokesman for the insurance industry in the United Kingdom on the link with climate change.
All too often it seems the serious issue of climate change is being generalized, debated publicly and without clarity of evidence. And insurers entering the debate risk being seen by insurance buyers as self-serving.
In the U.K., there is a generally accepted need for more housing, and demand is greatest in economically booming areas such as the south of England. Unfortunately, this pressure has in the past led to new developments in areas prone to flooding. Understandably, U.K. insurers have grown concerned, and while they have agreed to make flood insurance available where the flood risk is adequately managed, they have been critical of the government for allowing further developments in areas of high flood risk.
It was on this issue that the spokesman for the Association of British Insurers was putting his case. While he had a strong argument that insurers should not be expected to pay where developments do not have adequate flood protection measures, he added that increases in flooding were linked to global warming.
And this debate is taking place at a time when the south of England is experiencing drought conditions. Some may argue that these drought conditions were also caused by climate change. A point that has caused some confusion among some insurance buyers who cannot get property cover for flooding when they are at the same time suffering water shortages.
Linking weather risks to climate change is not new. Following two years of record hurricane losses in 2004 and 2005, climate change was mentioned by several insurers when discussing the perceived increase in windstorm exposures.
The ABI's stance on flooding and climate change is an interesting example of what is an emerging trend in the insurance industryto voice an opinion on climate change.
European insurers such as Swiss Reinsurance Co. and Allianz A.G. have issued papers on the subject and the European insurance industry trade body Comité Européen des Assurances has also issued a study. And in most cases the intentions of insurers are honorable, even admirable. As businesses that would be directly affected by climate change, they have a legitimate reason to lobby governments to take action.
Both Allianz and Swiss Re have even take action themselves and committed to reducing, or "offsetting" by investing in environmentally-friendly projects, the carbon emissions made by their businesses.
But buyers of insurance should beware.
Insurers may be tempted to selectively use scientific climate change evidence to their advantage when talking about price and coverage. While this has yet to happen, there are questions over the industry's reaction to the 2004 and 2005 hurricane season.
Insurers said that they have had to adjust their long-term assumptions regarding United States hurricane landfall, and this has been reflected in upward pricing. However, this year's hurricane season has been somewhat uneventful, in spite of predictions for above-average hurricane activity in 2006. It would also be all too easy to confuse climate change with what otherwise could be seen as just weather-related risks.
In the case of the ABI, flood risks in the U.K. are a real issue and one in which the industry has a legitimate reason to voice its concerns. If developers continue to build in flood prone areas without building adequate flood defenses, insurers will not be able to provide cover.
If insurers enter the debate on climate change, they have a responsibility to stick to the facts and not fuel an uninformed public debate. And when insurers make claims such as climate change will lead to increased flooding or more U.S. hurricane landfall, buyers should also question the validity and impartiality of their evidence.