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.
Lawsuit risk. Insurance broker Marsh also is positioning itself as a corporate consultant on climate change, which it regards as a "megatrend risk," along with terrorism or pandemics. Marsh dispatched six executives on a leadership building/climate awareness expedition to Antarctica this year. The firm's white paper warned that beverage companies will need to be concerned about water availability in case of drought, and banks will have to worry if they have high-risk loan portfolios. Most significant, Marsh warned that it was unlikely that companies' current environmental policies would protect against lawsuits over climate change.
Courts so far have rejected carbon claims against energy firms, but future lawsuits may be a more predictable risk than hurricanes.
Swiss Re has been talking about similar ideas for more than a decade--perhaps not surprisingly, since as a reinsurer it takes on much of the catastrophe risk from front-line insurers. The company is now in the forefront of some potentially profitable businesses, such as the global market in weather derivatives, which mushroomed from $8 billion to at least $40 billion in just the past year. These financial instruments allow energy companies, farmers, and other businesses dependent upon weather (an estimated 30 percent of the U.S. economy) to hedge the risk of excessively hot conditions or drought. "Wherever there is a risk," says Ivo Menzinger, head of sustainability for Swiss Re, "there is also an opportunity."
Of course, for those who buy insurance industry services, that also means new costs. Forget what's happening in Washington, D.C. The incentive for climate change action may come not from politicians but from a marketplace that is already raising the price of protection.
This story appears in the June 5, 2006 print edition of U.S. News & World Report.