Forbes, via Thomson IM: Insurance companies urgently need to develop climate change strategies beyond examining historical data or risk becoming the 'victims' of increasing extreme weather events sparked by climate change, according to F&C Asset Management.
Traditional risk models have relied on historic claims data to price future risk and determine underwriting requirements but climate change is making this an unreliable guide to the future, F&C said. The fund manager has published a report which argues risk may be being systematically under-priced, which could significantly impact the profitability of the sector and have implications for capital adequacy requirements.
Vicki Bakhshi, associate director of governance and sustainable investment at F&C, said: 'Insurers are currently standing at a crossroads. If they don't act they are in real danger of becoming the victims of climate change, subject to ever increasing risks in their investment portfolios and claims that exceed their projections.'
While the impact of climate change will primarily fall on property cover, F&C highlighted implications for other areas of insurers' businesses. Companies operating in vulnerable areas face the risk of having their operations interrupted; health and life insurance may be impacted by climate change increasing mortality and morbidity rates as diseases enter new territories.
Also, both liability and professional indemnity insurance could suffer as companies find themselves facing lawsuits under changing legal regimes and customers sue property developers for damages not covered by policies, F&C said in the report.
The report points out that while some insurers have introduced measures to encourage customers to reduce the risks they face - such as reducing premiums for those who install flood defences on their homes - a more common response has been to withdraw from high risk areas, forcing the state to step in…
F&C said that even though the global insurance industry has some 16.6 trln usd of assets under management, 'many insurers fail to see a link between climate change and the value of the assets they hold'.
Bakhshi continued: 'F&C, as a major asset manager, has significant long-term investments in the insurance sector. We therefore have a very real interest in seeing insurance firms respond to both the opportunities and the threats of climate change.
'By acting now the insurance industry can play a key role in shaping and financing the solutions to climate change. Insurers can work with governments and regulators to get the right conditions in place both to maintain a healthy insurance industry, and to help society cope as climate change hits home.'