The insurance industry has defended itself from recent comments by Bank of England Governor Mark Carney that climate change poses an enormous risk to insurance companies.
Carney last week devoted a lengthy speech to Lloyd’s of London to what he called the “tragedy of the horizon”.
“The combination of the weight of scientific evidence and the dynamics of the financial system suggest that, in the fullness of time, climate change will threaten financial resilience and longer-term prosperity,” he says.
“Since the 1980s the number of registered weather-related loss events has tripled and inflation-adjusted insurance losses from these events have increased from an annual average of around $10bn in the 1980s to around $50bn over the past decade.
“The challenges currently posed by climate change pale in significance compared with what might come. The far-sighted amongst you are anticipating broader global impacts on property, migration and political stability, as well as food and water security.”
Carney says climate changes threatens financial stability, and the insurance industry, along three channels: the physical risks and liabilities from weather-related events, liability risks if those who have suffered damage from the effects of climate change successfully seek compensation from those they deem responsible, and transition risks, such as severe losses to insurers’ investment portfolios as the world shifts to a low-carbon economy.
“We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors – imposing a cost on future generations that the current generation has no direct incentive to fix,” he says.
“The horizon for monetary policy extends out to two to three years. For financial stability it is a bit longer, but typically only to the outer boundaries of the credit cycle – about a decade.
“In other words, once climate change becomes a defining issue for financial stability, it may already be too late.”
Carney says modelling done by Lloyd’s itself had found that the estimated 20cm rise in sea-level around Manhattan since the 1950s increased Superstorm Sandy losses by 30% in New York alone.
“Insurers are therefore amongst those with the greatest incentives to understand and tackle climate change in the short term,” he says.
“Your motives are sharpened by commercial concern as capitalists and by moral considerations as global citizens. And your response is at the cutting edge of the understanding and management of risks arising from climate change.”
However, Insurance Council of Australia CEO Rob Whelan says although climate change may pose a significant long-term financial risk to insurance companies, his comments are more relevant to the northern hemisphere.
“Australia’s general insurance sector is well managed and tightly regulated, and has consistently demonstrated it is adept at coping with the extreme weather conditions it regularly faces,” he says.
“It is exceptionally well provisioned from a capital adequacy perspective and also has strong reinsurance support for catastrophes.
“The ICA notes that the Productivity Commission has previously found that government investment in permanent mitigation infrastructure to protect high-risk communities is more prudent and effective than pouring funds into disaster relief.
“It has also concluded that taxes on general insurance premiums are a barrier to effective adaption to climate change. By removing these inefficient taxes, governments will encourage more Australians to take out policies to protect their financial assets.”
Read the full speech here.