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Climate Related Perils Could Bankrupt Insurers

stop esso | 10.10.2002 10:29


Zurich, Switzerland, October 8 2002
Environmental News Service

Climate change is causing natural disasters that the financial services industry must address, a group of the world's biggest banks, insurers and re-insurers warned Monday. They estimated the cost of financial losses from events such as this summer's devastating floods in central Europe at $150 billion over the next 10 years.

"Climate Change and the Financial Services Industry," a report supported by 295 banks and insurance and investment companies, was launched Monday at the Swiss Re Greenhouse Gas conference in Zurich.

A partnership between the United Nations Environment Programme (UNEP) and the financial institutions, known as UNEP Finance Initiatives commissioned the report. It shows that losses as a result of natural disasters appear to be doubling every decade and have reached $1 trillion in the past 15 years.

"The increasing frequency of severe climatic events, threatening the social stability or coupled with significant social costs, has the potential to stress insurers, reinsurers and banks to the point of impaired viability or even insolvency," the report concludes.

John Fitzpatrick, CFO and member of the Executive Board of Swiss Re, said, "Climate change and substantial emissions reductions - like any other strategic global business challenge - ultimately becomes a financial issue. The problems associated with environmental disasters quickly become measured in dollars and cents. Our industry needs to lead by developing financial solutions and risk mitigation techniques to assist our clients in achieving global emission reductions."

"In addition to the emitting industry needing to take a carbon constrained future into account," Fitzpatrick said, "the financial services industry, of which we are a part, also has an obligation to contribute to the solution of these problems through its own investments and business expertise."

Linked to heat-trapping emissions from the combustion of coal, oil and gas, the environmental implications of global warming (news - web sites) are serious. Melting polar ice caps and glaciers, rising sea levels, distorted weather patterns, and drought are widely forecast. Coastal cities, crops, and animal habitat could be destroyed.

But too few financial companies are taking the risks and opportunities posed by climate change seriously, a survey of mainstream financial institutions carried out for the UNEP Finance Initiatives report indicates. Most are "unaware of the climate change issue" or have adopted a "wait and see policy."

These attitudes are "due to the prolonged wrangling over the Kyoto Protocol (news - web sites)," the report states, compounded by "the lack of solid information on emissions and delays in finalizing the regulations of the new greenhouse gas markets."

The protocol, agreed under to the United Nations Framework Convention on Climate Change, limits the emission of six greenhouse gases linked to global warming. Thirty-nine industrialized nations were to have been governed by the original agreement signed in Kyoto, Japan in December 1997, but the Bush administration said in 2001 that the United States would not ratify the protocol, and Australia followed suit this summer. It still has not entered into force.

A small group of financial companies is addressing the issue, but many of them are reinsurers whose businesses are already feeling the economic impact of rising, weather related, insurance claims.
"This report is a wake up call for the global financial community. It highlights the real risks and economic perils they are facing as a result of human influenced climate change," said UNEP Executive Director Klaus Toepfer.

The property market, where loans for houses and buildings are made over relatively long periods of time, could be particularly vulnerable as a result of extreme weather events, the report warns. "Homeowners and companies with property holdings may find that their insurance cover is cancelled at short notice, leaving them highly exposed."

Government action to arrest the problem will "inevitably" mean a reduction in emissions of the main sources of greenhouse gases linked with global warming, predicts the report. This will require cutbacks and the more efficient use of fossil fuels such as coal and oil.

Asset managers who are slow to appreciate the climate change threat "may see the value of energy or power company holdings decline" as investors become aware of the liabilities linked with carbon intensive industries, the report concludes.

Recommendations in the report's "blueprint for action" include urging insurers and re-insurers to better reflect the risks from climate related perils in policies and to develop public/private partnerships in high risk areas so that cover can be maintained. Commercial banks should fully price risks from climate change into loan agreements and give incentives to schemes that encourage energy efficiency or cleaner fuels.

Greenhouse gas trading markets will need standardized accounting methods to operate, an area where financial professionals can contribute to solving the problem.

"Given the financial muscle available to them," said Toepfer, "these institutions could move markets and minds to deliver a cleaner, healthier and less vulnerable world for the benefit of the world economy, for the benefit of people everywhere."

Governments are urged to adopt a long term global plan to keep greenhouse gases at safe levels. This is "vital" because the Kyoto Protocol runs out in 2012, the report points out, whereas "carbon dioxide, methane and the other greenhouse gases can persist in the atmosphere for many tens of decades."

The report was prepared by investment research and advisory firm Innovest Strategic Value Advisors of Toronto, Canada, under the direction of the UNEP FI Climate Change Working Group - Andlug Consulting, Citigroup, Corporacion Andina de Fomento, Dresdner Bank AG, Gerling Sustainable Development Project GmbH, Munich Reinsurance Company, Prudential, SAM Sustainable Asset Management, and Swiss Re

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