Insurers May Cash In on Climate Change
Climate change isn't just a crisis. It's a business opportunity--at least in the view of insurance industry leaders, who are mapping out a strategy that could force the rest of the economy to grapple with global warming as never before.
American International Group, the world's largest insurer, announced two weeks ago that it was "actively seeking to incorporate environmental and climate change considerations across its businesses." It is developing new products to respond to the global drive to reduce carbon dioxide emissions. Last month, the No. 1 insurance broker, Marsh & McLennan, distributed a white paper to a roster of Fortune 500 clients, suggesting that corporations ranging from soft-drink companies to banks may need to respond to global warming or be left out in the cold.
These are the first such moves by U.S. insurers, but in Europe, giant reinsurers like Swiss Re have long been active in the Kyoto Protocol, under which 36 nations have been participating in a market-based system to cut carbon dioxide. The phenomenal growth of that fledgling market, coinciding with last year's record claims due to the violent Gulf Coast hurricanes, has focused insurers on the money that could be made--or lost--on climate change. That's a welcome development for environmentalists. "They are a high-leverage, high-impact industry," says Mindy Lubber, president of the shareholder activist group Ceres. Ceres coordinates the Investor Network on Climate Risk, institutional investors who manage $3 trillion in assets and have been pushing for insurers to become advocates on the issue, much as they pushed successfully in the past for fire codes or auto safety regulations.
Many attribute insurers' new climate awareness to the record $55.3 billion in natural disaster losses they sustained in 2005, double the previous high point set just the year before, with Hurricane Katrina leading the pack.
Retreating. Insurers certainly are pushing through massive rate increases on the southeastern coast of the United States, retreating from some areas altogether, but the companies maintain that these are standard underwriting decisions, separate from their climate change activities. "We don't make the leap where we are saying that we endorse the idea that hurricanes are a direct result of global warming or that global warming is a direct result of human activities," says Chris Winans, an AIG vice president. "But we take the possibility seriously."
The climate strategies the insurers have spelled out aren't about avoiding losses; they're about generating revenue. For example, AIG aims to get in on Europe's carbon-trading scheme, a market valued at $10 billion last year and, although climbing out of a precipitous fall a few weeks ago, one that is expected to surpass $25 billion in 2006. Even though the United States has not signed on to Kyoto and does not participate, AIG says it will invest in projects around the globe aimed at generating credits to trade on this market. (Buyers would be factories or power companies that are struggling to meet their emissions limits under the treaty.)
Karl Schultz of the consulting group Energy Edge in London says there's "something of a feeding frenzy" of investors clamoring for United Nations approval of their green energy projects so they can trade credits. "Now you're seeing a whole new breed of people coming out of the more traditional financial institutions--the pure business suits as opposed to suits that carry the green badge," Schultz says. AIG also wants to advise corporations, consulting with them on how to get into the carbon market and even developing a new insurance policy to protect against the risk of a project's failure to generate tradable credits.