Amid rising temperatures and increasingly frequent and severe natural catastrophes, the ability of property and casualty insurers to adapt has never been more critical – a message Bank of England Governor Mark Carney drove home in a speech this week.
While climate change poses a long-term threat to the financial stability and economic strength of countries around the world, Mr. Carney said, it is the insurers that have major incentives to study and change their coverage sooner rather than later.
Even with that head-start, insurance companies are being closely watched for their ability to handle climate-change risks, and the effect that altered policies might have on people. As Mr. Carney said to insurers: "You should not assume your ability to manage risks today means the future is secure."
The former Bank of Canada governor spoke about the issue at a dinner held by Lloyd's of London on Tuesday. The speech – given to an insurance group that has covered many disasters over its 326-year history, from the sinking of the Titanic to the Deepwater Horizon oil spill – comes ahead of a summit in Paris to consider the world's response to climate change.
Canada's most recent example of climate-change pain was the flooding and hailstorms in Alberta in 2013, which led to record payouts of more than $1.7-billion. The threat of massive earthquakes and other nearby disasters, such as Hurricane Sandy, are reminders of potential vulnerability to weather-related disasters.
And that's just the tip of a melting iceberg. Looking farther ahead, there are increased threats of political instability, food and water insecurity and property value volatility as climate-related changes ripple through future generations. Disease and death rates could also be influenced by global warming. Some studies have argued that insurers aren't ready for that onslaught.
Meanwhile, even as global businesses battle cyber and branding threats, they still rank natural catastrophes and interruptions to their operations and supply chains as top concerns, according to 2015 data from German insurer Allianz SE, which has operations around the world.
On one hand, Mr. Carney commended insurance companies for being at the "cutting edge of the understanding and management of risks arising from climate change." On the other, he noted that insurers' response to climate-change risks could harm the people, companies and governments the industry is supposed to protect.
"Insurers' rational responses to physical risks can have very real consequences and pose acute public policy problems," Mr. Carney said, pointing to breakdowns in some regions where frequent disasters led insurers to refuse affordable insurance coverage, prompting mortgage lenders to withdraw and property values to plummet. In flood-prone parts of Alberta, there are now some areas where home insurance is available, but too expensive to be practical for most homeowners. "While the insurance industry is well placed to adapt to a changing climate in the short term, their response could pose wider issues for society, including whether to nationalize risk," he said.
Mr. Carney also expressed concerns about insurers' investments on the assets side of their businesses, from changes to real estate property values to demand for oil, gas and coal as renewable energy gains traction.
"Prudent decisions by underwriters" could "lead to falls in the value of properties held by the firm's asset managers," he said.
Still, the transition to a low-carbon economy must be handled delicately, Mr. Carney said. He isn't pushing for rapid reform that might destabilize markets. Instead, he hopes that steady reforms, such as more corporate transparency and disclosure of companies' carbon footprints, climate change might be slowed without massive waves rocking global financial systems.
"With better information as a foundation, we can build a virtuous circle of better understanding of tomorrow's risks, better pricing for investors, better decisions by policy makers, and a smoother transition to a lower-carbon economy," he said.