On the brink of disaster

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24th August 2006

ON THE BRINK OF DISASTER

Global changes in temperature, sea levels, rainfall are now a fact.

Lloyds Market Report 24/08/2006 – extract.

It is a controversial subject that shows no sign of disappearing – the debate about the effects of climate change is here to stay. Whether or not scientists, insurers, businesses and other parts of society agree on the causes of global warming, the fact is that levels of carbon dioxide and the earth’s temperature are rising, and fast.

While the Intergovernmental Panel on Climate Change assessment report in 2001 predicted global temperature rises of up to 5.8 degrees Celsius within the next century, experts believe that rises could be as much as 10 degrees Celsius.

According to Professor Bill McGuire, there is now serious concern that climate change is accelerating out of control and that the melting of the Greenland ice sheet may be irreversible and catastrophic, bringing a rise of one to two metres in sea level this century and several more in the hundred years following.

“Just as disturbing,” he adds, “is the recent evidence that the Gulf Stream seems to have slowed by a third in the past 15 years, bringing the prospect of a return to Little Ice Age conditions in the UK and northern Europe, perhaps within a decade. Clearly, then, there is absolutely no time to lose if the insurance market is to reposition itself to effectively confront climate change. Action is needed today.”

Regardless of how accurate scientists can be about rising temperatures, the fact is that property insurers paid $83 billion in claims last year alone, with the vast majority arising from natural disasters, which some believe have been exacerbated by climate change.

Climate change: adapt or bust

In launching its new 360 Risk Project and its report on climate change – Adapt or Bust – Lloyd’s claimed that, when it comes to climate change, the insurance industry is yet to take “changing catastrophe trends seriously enough”.

One of the main challenges facing the insurance industry is uncertainty. Although the body of evidence shows that climate change is affecting global temperature, sea levels and rainfall, the industry has so far struggled to develop models that keep pace with these trends.

“Recent events have shown capital and pricing models to be wanting, “the report says. “Insurers must regularly update and recalibrate our models to keep pace with reality. Catastrophe modelers have now reacted to criticisms following the recent record US hurricane seasons”.