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Insurance execs debate climate change issues

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TUCKER'S TOWN, Bermuda—Climate change's effect on the insurance industry and regulatory developments were among key topics discussed at the recent World Insurance Forum in Bermuda.

An executive panel moderated by AXIS Capital Holdings Ltd. Chairman Michael A. Butt discussed whether climate change represents a threat or an opportunity for the global insurance industry.

By itself, “climate change is a threat to our business; it's not something we can safely muddle through,” said Barney Schauble, a managing partner at Hamilton, Bermuda-based Nephila Capital Ltd., an investment management company that specializes in insurance and reinsurance. “If pricing of existing products can reflect the underlying risk, then climate change is an opportunity—if not, then it's a threat,” he said.

David Bresch, head of sustainability and emerging risk management at Zurich-based Swiss Reinsurance Co., noted that climate change is difficult to translate into product pricing. “When we renew contracts, climate change is always high on the agenda. Quantitative assessment is utterly difficult, and it will be difficult to put those numbers into models,” he said.

The insurance industry has “the capacity to play an important role in the worldwide discussion of management of global warming,” said Peter Hoeppe, a professor of meteorology and biology and head of geo risks and the corporate climate center at Munich-based Munich Reinsurance Co. “The insurance industry is one of the largest investors in the world, and more and more investments are in new technologies” that can reduce carbon emissions, Mr. Hoeppe said.

Members of the industry have differing viewpoints, noted Rolf Tolle, former head of the franchise performance directorate at Lloyd's of London. “Where we have failed is in working with society and politicians and making it clear what the consequences are,” he said. “We're still not all marching in the same direction. With one voice as an industry, we could be much more effective” in leading the discussion on climate change.

Mr. Butt questioned whether products addressing climate change can have risk-based pricing.

“What we have today is average risk prices; we subsidize high-risk with low-risk,” said Mr. Tolle, citing as an example property construction in catastrophe-prone areas. “We don't have enough data” to factor climate change risk into pricing, “but one thing we can do is to reward people for improving the risk,” he said.

“Mitigating or reducing vulnerability is key to keeping risks insurable,” said Mr. Hoeppe. “For example, it is essential to avoid more development in flood-prone areas.”

Also participating on the climate change panel was Kyle Danish, a partner at law firm Van Ness Feldman P.C. in Washington.

Another panel at the WIF, moderated by Constantine Iordanou, chairman, president and CEO of Arch Capital Group Ltd., explored risk assumption by the private sector and funding from governments and taxpayers, focusing on responses to catastrophic events.

“The insurance industry in general, and the Bermuda marketplace particularly, has shown itself to be remarkably creative in getting ready to serve again” after catastrophes strike, said Mike McGavick, CEO of Bermuda-based XL Capital Ltd.

“The role of the industry in the 9/11 terrorist attacks is underappreciated,” said John Degnan, vice chairman and chief operating officer of Warren, N.J.-based Chubb Corp. “Within days, most companies said they would not apply the war risk exclusion. The economic terrain got stabilized, and that defeated the terrorists' main objective,” he said. “We didn't ask for a dime to pay the $40 billion in losses” resulting from the World Trade Center attack.

Scott Harrington, a professor at the Wharton School at the University of Pennsylvania, said the insurance industry “doesn't get the credit it should” for responding to catastrophes. “It's difficult to explain to people why rates increase. People tend to think companies just recoup their losses,” he said.

Representing government on the panel was Ray Spudeck, chief economist in the Florida Office of Insurance Regulation, who discussed the state's experience with hurricanes. “We've learned our lesson. You not only need to have building codes, you have to enforce them,” he said.

When asked about a public funding mechanism prior to a catastrophic event, Mr. Spudeck said, “I'd rather have something before a catastrophe; it reduces confusion” over how losses will be funded.

Mr. McGavick, however, questioned the need for government catastrophe funding. “What is the greater social purpose of government intrusion in these markets? The gearing of private insurance allows for economic activity, and when there's a disruption (from a catastrophe), you want economic activity,” he said.

Also speaking on the panel was David Brown, CEO of Flagstone Reinsurance Holdings Ltd. in Bermuda.