TCS Daily


Insuring Climate Change -- High Risk Business

By Alan Oxley - December 27, 2004 12:00 AM

Alarmism over climate change has created many bandwagons. One is Europe's insurance industry. It is an official "business partner" of the United Nations Environment Program (UNEP), the UN's official climate change booster. Many businesses seek a Green afterglow as global warming fellow travelers. The insurance companies claim a higher tone. They are in it to contribute. They may be taking a bigger risk than they realize.

Kyoto old-timers suspected things could go poorly at the tenth annual UN Climate Change conference in Buenos Aires earlier this month. Although the Kyoto Protocol was about to enter into force, it was still defective. They knew the US and the developing countries could outvote the EU and were concerned the conference might pigeon-hole Kyoto rather than extend its key obligations beyond their expiry date in 2012. They were right.

Green NGOs like Friends of the Earth went to Buenos Aires apprehensive but not deterred. They wanted to keep the temperature high at the conference. A new report on the Arctic had been released just before the conference. Green NGOs claimed it showed the Arctic was melting because of global warming.

Munich Re, the German insurance group, made its own contribution. It announced a study which showed how greenhouse warming had increased the incidence and intensity of natural calamities, for example the record hurricanes in the Caribbean last season. The report was released at a special event by Munich Re executive Thomas Loster and Klaus Topfler, Head of UNEP.

Herr Topfler described Munich Re for as an exemplar for the private sector. The extreme weather was harming small developing countries so the need to stop global warming was "urgent". (Topfler is an established exaggerator. His claim that urgent action on climate change would give demonstrable help to developing countries is not even backed by studies commissioned by the UN. They show that if all countries started tomorrow to reduce emissions of carbon dioxide under the Kyoto program, global atmospheric levels of CO2 will not fall, but after 50 years their rate of increase might marginally fall. So if today's levels of CO2 are causing calamities, that will continue)

Bill O'Keefe, President of the Marshall Institute, a science public policy centre in Washington DC, thinks it likely that Munich Re have observed nothing more than a well-established cyclone pattern. Cyclone activity in the early nineties was at a cyclical low; it was due to increase.

Unfortunately no one could examine the Munich Re report because Herr Loster said it would not be available for several months. We are used to Green NGOs making claims without supporting data, but not large global finance companies, for whom reputations of prudence are important.

Loster said governments needed to commit to reduce emissions in the post Kyoto period. It they didn't companies like Munich Re "would lose the appetite" for instruments to help manage the impact of bad weather. He was asked to explain. He said Governments needed to increase the range of opportunities to enable companies to spread liability, but did not elaborate on just how this would work.

Either Munich Re believed, like Topfler, that immediate respite from global warming was possible (surely not, Munich Re's profits depend on sound, technical assessments of events they insure) or hoped Governments would underwrite weather damage (enabling insurance companies to provide limited insurance cover on top of that). Well, Munich Re would not be the first into that. US insurance companies have long enjoyed government subsidy for coverage of natural events.

But Topfler had other ideas. He reprimanded Loster for giving the wrong answer. Topfler said the finance industry could play a more direct role. Share markets for example could set the price of shares of companies according to their approaches to global warming: mark up the price of companies combating global warming and mark down those who weren't. It is obvious UNEP relies on government handouts, not income from share portfolios.

Herr Loster did not comment. But others have. Swiss Re, another large European insurer, climbed aboard the global warming bandwagon early. It announced a decade ago it would work to develop insurance products to help mitigate the effects of global warming. The insurance products have been slow to materialize. Corporate policy has been easier. Swiss Re established a Globalization centre which has sponsored several conferences on global warming.

It also recently established a Greenhouse Gas Risk Solutions Unit based in New York. Its focus also appears to be corporate policy. In a supplement to a special conference edition of "Environmental Finance", the head of the Unit, Christopher Walker, wrote that institutional investors have a critical role to play by, for example, valuing more highly companies that are effective in climate change risk management and (get this) even as owners by influencing corporate policy through their voting proxies and direct engagement. Does Swiss Re intend to follow this policy itself with the companies in which it invests? It would undermine its own business if it did.

Just what is going on in this industry? One is tempted to say these insurance companies are hedging. That of course is a joke. These companies are engaging in high risk corporate policy. At risk is their own reputation for careful assessment of risk and prudent investment policies. Or do Swiss Re and Munch Re think it does not matter what company you keep or what corporate policies you promote?

Alan Oxley is host of the Asia Pacific page of www.tcsdaily.com and presented a report on the impact of Kyoto on Asia's fast growing economies at the Buenos Aires conference.


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