Climate change turns up the heat on insurers’ financial stability
Lloyd’s List, 6 May 2005 – Insurers and reinsurers must wake up to the threat of climate change to their financial strength, a new report has warned, writes James Brewer.
Current financial models and assumptions failed to factor in the full effect of climate change, leaving investments exposed to significant risks in the long term, said the report, by actuary Louis Perroy of Climate Change Capital, a specialist merchant banking group focused on efforts to move to a low carbon economy.
Mr Perroy said that while insurance and reinsurance companies are beginning to include climate change impact in their assessments of insurable risks, the direct effect on assets and liabilities have not yet been fully considered.
Assets and liability management was crucial as it translated into medium to long term cash flow projections.
Mr Perroy said that catastrophe reinsurance and insurance claims would worsen across all industry lines.
New regulations such as the Kyoto protocol would impact on greenhouse gas-emitting sectors, such as oil, gas and energy sectors, in which the insurance industry was a major investor.
Negative macroeconomic consequences would in turn impact on financial assets.
Mr Perroy recommended a series of investment strategies to tackle the risks of climate change. These included progressively allocating capital to renewable energies or low carbon technologies; the exclusion or differentiation of risks for insurance purposes; and investment in efforts to challenge the consequences of climate change.
His report called for more research into the impact of climate change on natural catastrophes, mortality, morbidity and health insurance premium calculation. Under the title Impacts of Climate Change on Financial Institutions’ Medium to Long Term Assets and Liabilities, the report will be presented to the Institute of Actuaries on June 14.
Â© 2005 Lloyd’s List International