Cicero Policy Briefer

Issue 2, July 2006

Heavy weather: insuring against climate change

By James Allen

The issue of climate change is now firmly entrenched in a prominent position on the political and media agenda. In business, the strategy in facing climate change can no longer be seen as a PR ‘add-on’ to boost CSR or a reactive strategy in simply conforming to new legislation. Though many dismissed David Cameron’s recent trip to the North Pole as a cynical PR stunt, the reality is that considering climate change is now of crucial political importance.

On a recent tour of the UK, former US Vice President and Presidential candidate in 2000 Al Gore commented: "We face a challenge in the conversation of democracy that we must be up to in order to save the climate balance on which our civilisation depends.” The media attention that his speech generated and the daily, visible effect of climate change both in terms of changes to the weather and, for example, the raising of the Thames Barrier in London at increasingly frequent intervals, both serve as a constant reminder of the enormity of the task in hand.

Climate change, manifested most clearly in extreme weather, will have a major impact on business interruption. The general and re-insurance industry in particular must be part of the developments to fully incorporate the effects of climate change into its business planning and recognise that, in so doing, a major reassessment of business practice may be required. For the insurance industry, changes to the calculation of risk will be needed. Difficult decisions lie ahead in determining when cover may have to be amended or indeed refused altogether (thinking in particular of developments in the Thames Gateway area), along with the challenges that rising insurance costs through increased instances of extreme weather will bring. The sector must continue to ensure that underwriting for insurance against the effects of climate change is conducted to the highest standards. It is imperative that the insurance industry sees its role not simply to react to events such as Hurricane Katrina, but to be at the forefront of business and policy changes to minimise the effects of extreme weather.

In what ways can the industry play an active part in this field? Through incentives to help business-developing continuity plans, through risk pricing and through encouraging companies to adopt more environmentally responsible practices, the insurance industry is well placed to engage in dialogue with policy-makers and other stakeholders in the climate change debate. The industry has enormous expertise in risk management, through commissioning research into climate change and by seeking to contribute to policy debate across several sectors – most notably planning, where efforts to substantially increase the UK housing stock must take environmental risks such as flooding into account.

Government policy to head off the worst potential effects on the industry will be most successful, and most accommodating to the needs of business, when drawn up in partnership with the insurance industry. The industry can communicate with its customer base to ensure that businesses are adequately insured and that businesses have a continuity plan in place. First, though, the insurance industry needs to take a lead in examining its own business practices and ensuring that these are compatible with efforts to make business more environmentally conscious.

James Allen can be contacted on +44 (0)20 7665 9530 or click here to email.

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