Lloyd’s climbs on the climate change bandwagon

There’s little doubt that the world is getting warmer. But this raises more questions. To what extent are greenhouse gasses, particularly CO2, responsible? Will the warming trend continue? Are there any effective measures that can be taken to slow down or reverse it? Are the dire predictions of worldwide catastrophes justified?

The insurance industry has made strong commitments to address the potential climate change problems. The latest pronouncement came from Lloyd’s Chairman Lord Peter Levene. In an address to the World Affairs Council in Washington, D.C., on Friday, Jan. 12, he stated: “We cannot risk being in denial on catastrophe trends. We urgently need a radical rethink of public policy, and to build the facts into future planning.”

He stressed the importance of convincing the United States to take action. He noted that Lloyd’s has “a particular responsibility to understand those trends in the U.S., our largest market, where we underwrote a record $12 billion of insurance and reinsurance here last year.” Levene warned that failure to “prepare and adapt quickly and vigorously” would risk “putting society’s future in grave danger.”

His direct appeal for action reinforces Lloyd’s concern over global warming. Last June, Franchise Director Rolf Tolle, commenting on Lloyd’s first “360 Report,” stated: “Although it’s almost two decades since the U.N. (United Nations) recognized that climate change was a catastrophic threat to earth, it’s clear that the insurance industry has not taken catastrophe trends seriously enough. As an industry we must work together to understand and manage these new risks, and to change our behavior.

“Today’s risk environment is changing and evolving — more rapidly than ever before,” he continued. “So at Lloyd’s, understanding and anticipating major risk trends is at the heart of all we do. Climate change is today’s problem, not tomorrow’s. If we don’t take action now to understand the changing nature of our planet and its impact, we will face extinction.”

Levene aimed three rhetorical questions at his U.S. audience: “First, is the U.S. a nation in denial? Today the insurance industry faces the prospect of a $100 billion mega-catastrophe twice the size of Katrina. We need to wake up to the truth about catastrophe trends and radically review our public policy.

“Second, is the insurance industry strong enough to protect its policyholders against Mother Nature? Insurance has a vital role to play as a supporter and enabler of the economy — but it can only do that where free market forces prevail.

“Third, what action can we take on climate change? We believe that an international partnership which brings together governments and businesses is the only solution, and there are sound business reasons to change our behavior.”

Levene’s responses are familiar. He reminded his audience of the terrible 2004-05 hurricanes and the threat, despite the 2006 respite, increasingly powerful natural disasters pose. He challenged the idea that the industry has made excessive profits, indicating that for the health of world economies must remain strong. Solid balance sheets and adequate reserves are vital. Nor did he miss an opportunity to cite Lloyd’s long-standing complaints about discrimination against “alien” insurers.

The third question, however, remains the most unsettled and the most controversial. Levene noted some progress. He specifically cited initiatives by a number of states and local governments to “cut carbon dioxide or CO2 emissions by Kyoto levels.” A few days after his speech the U.S. Congress weighed in with a bill aimed at cutting greenhouse gas emissions by 2 percent a year. Levene sees in such measures a “groundswell of opinion which suggests action will become an increasing priority for business too.”

This “groundswell” may hold true for the insurance industry, which is in line to take the hits from catastrophic weather events, but elsewhere, particularly in the U.S., it’s more like a ripple.

Two days before Levene’s speech, Daimler Chrysler’s chief economist, Van Jolissaint, caused controversy after a report, broadcast by the BBC, said that any fallout from climate change is “way, way in the future, with a high degree of uncertainty.”

Chrysler challenged the report’s accuracy and asked for a retraction, which the BBC refused. (Transcript available at:http://news.bbc.co.uk/2/hi/business/6250327.stm.)

Jolissaint’s conclusions were triggered by the time he spent in Germany, where he saw a far greater concern among Europeans over climate change than from their American counterparts. He called studies, notably the U.K.’s Stern report, “highly political,” and saw no reason to radically alter the structure of society to meet the threat. He supports a “step-by-step” approach as opposed to playing “Chicken Little.”

He also indicated that “what you do is buy insurance” to cover the problem. While that might help Chrysler, it also highlights the risks that concern Levene and the rest of the industry. There are certainly people who would agree with Jolissaint’s attitude, but there are others who don’t.

Thomas Friedman, in a recent New York Times column, described his trip to Montana, where the State’s Governor, Brian Schweitzer, accompanied him to an open-pit coal mine. Friedman notes that Montana, with a third of all U.S. coal reserves (8 percent of world reserves), could supply the equivalent of 240 billion barrels of oil. Gov. Schweitzer, however, is committed to making sure that it’s burned cleanly by eliminating the CO2. He’s also skeptical about industry efforts to minimize adverse reports. He’s seen hard evidence of global warming and believes it.

Levene, however, made another point; becoming more energy efficient saves money and increases profits — even if it has no effect on global warming.

He recognized this in his conclusion, stating: “Mega-catastrophes and climate change are two powerful forces here to stay. We don’t yet know exactly what the future will bring. And there is little or nothing that could be done now to turn back the clock. Even if we stop all man-made CO2 emissions now, we would still endure 30 years of warming before the effects take hold. But we must not use that as an excuse not to act. History, and future generations will surely not forgive us if we do.”

Topics Catastrophe USA Excess Surplus Climate Change Market Lloyd's