Common Tragedies

Thoughts on Environmental Economics

Risky Business

Posted by Danny Morris on December 9, 2009

This post originally appeared on Weathervane, RFF’s climate policy blog.

If you’re looking for an industry that is on the cutting edge of assessing the effects of climate change and forming appropriate responses, look no further than the insurance industry. At a small side event sponsored by Climate Consortium Denmark, experts from major European insurance companies came together to call for a larger role for governments in the industry through public-private partnerships. The insurance industry has been dealing with nasty weather as long as it has been around, but the steroid injection of climate change into weather systems creates a whole new ballgame.

With those future risks in mind, Richard Ward, CEO of Lloyd’s, asked policymakers here at Copenhagen to help level the playing field amongst companies by strongly regulating the entire industry. While it’s not often you hear the CEO of a major corporation asking for stout government regulation, Ward emphasized the need for more clarity for future planning and investment. He also called for the formation of national adaptation plans, especially in developing countries, to provide the industry insights that can help move capital into new or burgeoning markets.

His calls were echoed by Patrick Liedtke of the Geneva Association, an international industry think tank, who said that the industry wants stronger partnerships with governments. He pointed to the Kyoto Statement, in which 56 insurance companies state their great concern about extreme climate change, as an example of the commitment of the industry to addressing climate change.

Two major issues popped up throughout the presentations that highlight the unique tension the industry faces. First was the role of insurance in the developing world. Insurance companies can encourage both mitigation and adaptation through investments in renewable and sustainable technologies and offering products that encourage adaptive measures and better building codes. Unfortunately, it can be difficult for companies to establish themselves in developing countries. Insurance is a luxury good, and poor farmers are more likely to spend money on extra livestock or seeds than on floor insurance. Consumers need much more education before they will try to access insurance markets. Moreover, many of these markets are still primitive and require government action to get firmly established. And while insurance companies can manage risk, they can’t reduce it alone, further showing the need for private-public partnerships.

Second is the issue of data. Both Ward and Liedtke emphasized the importance of robust data and the need for more data collection and data sharing from national governments. Better information will inform the risk assessments that are critical to the insurance industry and this need for better data has driven the industry to be on the forefront of climate assessments for years. “Good risk management needs good risk data,” according to Ward and he made a strong plea for governments to make more data freely and publicly available.

Data sharing is a two-way street however, and one (like me) could argue that the insurance industry needs to be more transparent with its risk assessments and make its data more accessible to the public. Prices that reflect true risks are the best way to make them clear to consumers, but there are other means to achieving clarity as well, including data and information sharing.

At the end of the day, it’s still the price tag that drives behavior, especially in insurance markets. Profit drivers are still an essential part of the system, so there is a limit to how much coverage can exist, especially in areas highly exposure to climate change risks. As national governments continue to devise ways to grapple with the effects of climate change, they may need to provide the insurance industry with a little more assurance that they won’t leave it over-exposed.

2 Responses to “Risky Business”

  1. Kavita Heyn said

    Very interesting insight into the insurance industry and climate risk. Thanks for sharing.
    Kavita Heyn

  2. I’d never really looked at Insurance quite this way before.. You make some valid points!

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