Changing the World

Our way of life is killing us, one could easily conclude from current research on climate change. In its June 2007 interim report to the Canadian government, the National Round Table on the Environment and the Economy (NRTEE) outlined its research findings on the state of today’s environment. It says: “Scientific research is increasingly certain that anthropgenic [i.e. human-created] GHG [greenhouse gas] emissions are creating a discernable impact on the earth’s climate. Central to this certainty is the observation that the atmosphere’s concentration of carbon dioxide (CO2), the principal GHG, is about 35% higher than its pre-industrial concentration of 280 parts per million by volume (ppmv). Further, the current concentration of CO2, about 380 ppmv, has not occurred for hundreds of thousands, and perhaps even millions, of years. CO2 emissions have grown between 1970 and 2004 by about 80%…” etc.

You can tell climate change is a serious issue, public commentators note, because even insurers — often presented stereotypically in our culture as agents of the status quo and pillars of the establishment — are starting to act as agents for environmental change.

In fact, the Insurance Bureau of Canada, no less, is calling for the Canadian P&C industry to lead the discussions with government in an effort to limit the effects of climate change.

What is the long-term impact of environmental change on the business of insurance? In its report, Tackling Climate Change, Swiss Re notes that: “For the 21st, century, a mean temperature rise of 1.4C to 5.8C is being predicted. The number of storms and floods with catastrophic effects for human beings has been rising rapidly throughout the world. While demographic changes in the areas most at risk are currently the main cause, it must be assumed that the observed global rise in temperature will increase the probability of extreme weather events.”

Globally, as Swiss Re notes: “According to a UNEP Finance Initiative report, climate change-driven natural disasters may lead to economic losses of US$150 billion per year within the next decade.” In the Canadian context, a 1999 study done for the Institute for Catastrophic Loss Reduction (ICLR) shows insured disaster losses due to severe weather-related events in Canada went from Cdn$39 million in 1984 to Cdn$1.45 billion.

So it’s no surprise that insurers are already in the forefront of the climate change discussion, although we do need to get past the discussion about how we need to discuss climate change. While we are busy discussing things, over the long-term, severe weather-related events are going to have a huge impact on the bottom line. And if things get bad enough, there may well be a debate in the future as to whether these types of events can even be insured anymore. The industry, after all, does not have an unlimited amount of wealth.

Sadly, solutions are not easy. Given that our economic behaviour plays a fundamental role in the health of our environment, any and all suggestions to mitigate environmental damage through the modification of our economic human behaviours are likely to sound “radical” to those who consider climate change to be an acceptable collateral cost of the way we live on this planet.

Perhaps as a way to bridge towards long-term, fundamental change, some insurers have promoted short-term “business opportunities” associated with climate change — i.e. increased demand for new risk transfer solutions such as catastrophe bonds; environmental liability protection for directors and officers in the wake of new environmental regulations; the reduction of business interruption claims through the use of environmental credits; etc.

This is a risky way to frame the issue. While these are no doubt legitimate ways for insurers to adapt to climate changes in the short-term, medium- and long-term solutions will need to consider more fundamental ways to change the human behaviours that contribute to the growth in greenhouse gases in the first place. Besides, talking about the environmental damage in terms of “opportunity” risks making the industry look like the bottom line is more important than the lives of policyholders.

If insurers publicly advocate for and develop products that influence change in consumer behaviours, then sure enough, the insurance industry will appear to be in the vanguard of the environmental movement. The industry should not be afraid to be bold on this issue. In fact, this might just be the perfect opportunity for the insurance industry to demonstrate how it really does advance the interests of all of us ahead of its own, narrower commercial interests.

Mea Culpa

I am embarrassed to point out that quite a few errors appeared in my editorial in August 2007. First, to clarify, the Cdn$242 million winter storm damage figure that I cited for B.C. was in fact an amalgamation of insured damages — which the IBC announced were Cdn$135 million — and uninsured damages (including hydro damage estimates, Stanley Park replanting, etc.). Second, the Edmonton fire estimates were insured damages (I incorrectly referred to them as “non-insured” damages). Finally, the study I cited as an A.M. Best report is in fact a Standard & Poor’s report. I apologize for these errors.