The real cost of climate change

Lloyds of London: "The sky is falling, the sky is falling!"

Published June 9, 2006 6:30PM (EDT)

Critics of the Kyoto Protocol and other mechanisms for slowing down global warming like to claim, in ominous apocalyptic tones, that any such measures will mean doom for industrialized economies. Higher energy prices, lower profits, etc. There are plenty of reasons to scoff at their thesis, but there's also a flip side. Not doing anything is going to be expensive too. A new report from the venerable insurance company, Lloyd's of London, warns that the insurance industry will likely be forced to raise premiums to cover losses due to climate change. (Thanks to Energy Bulletin for the alert.)

The report, "Adapt or Bust," doesn't provide much in the way of new information to seasoned climate-change obsessives. But its language is peculiarly compelling, as it is clearly not generated by political or ideological concerns. This isn't green Gaia-loving or anti-corporate bashing. It's a bottom-line appraisal. Extreme weather events are on the rise, and likely to get worse.

"Going forward," says Lloyd's, "we believe that the insurance industry should take a new approach to underwriting, looking ahead and not simply basing decisions on historical patterns, as has traditionally been the case. Pricing and capital allocation models must be updated regularly to reflect the latest scientific evidence, and not just in extremis, as has tended to happen in the past, for example after Hurricane Katrina."

The Bush administration has a well-documented record of trying to fudge the science of climate change. The insurance industry can't afford to be that stupid. To protect their own profitability, they're going to have to take care of the planet.

Going forward, the closing paragraphs of the report should be read aloud before every future meeting of a corporate board of directors.

"Insurers need to consider the impact that an unstable climate could have on global asset values, which may generate a mismatch against insurance liabilities. Asset values tend to react to new information as soon as it is known, and adjust accordingly even if the effects are likely to take effect some time in the future. Insurers rely on returns from assets to boost financial performance. If these returns reduce, whether gradually or suddenly, then insurer profits will be lower. Consequently, it will become even more important for insurers to price risk according to exposure, and to underwrite for profit, without reliance on investment income.

"The global financial services industry holds a significant proportion of the world's financial assets. Insurance industry participants can therefore make a difference by using their influence as investors to encourage 'climate proof' behavior from the boards of large corporations."

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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