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www.genevaassociation.org The Geneva Reports - The Geneva Reports Risk and Insurance Research The insurance industry and climate change – Contribution to the global debate No. 2 • July 2009 The Geneva Reports Risk and Insurance Research www.genevaassociation.org The insurance industry and climate change – Contribution to the global debate by The Geneva Association Climate change brings new risks but also new opportunities for the insurance sector. The insurance industry is forward-looking by nature and has a long-term comprehensive approach shared by few other economic actors. In the context of insurance and climate change, two main issues are addressed in this report: • Climate change is happening and calls for mitigation and adaptation measures. These differ between industrial countries and developing countries. From an insurance perspective, specifi c weather-related hazards will need to be identifi ed, quantifi ed and prioritized on a local level. • A low-carbon economy is the agreed societal vision and a transition to a more sustainable economy is inevitable for all countries to reach a low-carbon future. The transition to these low-carbon approaches will change the economic structure of many countries, hence the risks and opportunities for the insurance No. 2 • July 2009 industry as well as its relationship with the economic actors involved. No. 2 The report shows that climate change is about more than just extreme weather events. It analyses what July 2009 insurance companies are already doing, what they could do in the future and where they need the cooperation of governments and other partners to succeed. ISSN 1662-3738 The Geneva Association (The International Association for the Study of Insurance Economics) The International Association for the Study of Insurance Economics, or by its short name “The Geneva Association”, is a unique world organisation comprised of a maximum of 80 chief execu- tive offi cers from the most important insurance companies in the world (Europe, North and South America, Asia, Africa and Australia). It is a non-profi t organisation. Its main goal is to research the growing importance of worldwide insurance activities in all sectors of the economy. It tries to identify fundamental trends and strategic issues where insurance plays a substantial role or which infl uence the insurance sector. In parallel, it develops and encourages various initiatives concerning the evolution—in economic and cultural terms—of risk management and the notion of uncertainty in the modern economy. The Geneva Association also acts as a forum for its members, providing a worldwide unique platform for the top insurance CEOs. It provides a framework for its members to exchange ideas and discuss key strategic issues, especially at the General Assembly where once per year the top insurance CEOs gather. The Geneva Association serves as a catalyst for progress in this unprecedented period of fundamental change in the insurance industry. It seeks to clarify the key role that insurance plays in the future development of the modern economy. President: Dr Nikolaus von Bomhard, Chairman of the Management Board, Munich Re Group, Munich. Vice Presidents: Mr Michael Diekmann, Chairman of the Management Board, Allianz SE, Munich; Mr Kunio Ishihara, Chairman of the Board, Tokio Marine & Nichido Fire Insurance Co., Tokyo; Mr John Strangfeld, Chairman and CEO, Prudential Financial, Inc., Newark. Members of the Board: Dr Carlo Acutis, Vice President, Vittoria Assicurazioni S.p.A., Turin; Mr Antoine Bernheim, President, Assicurazioni Generali S.p.A., Trieste; Ms Stine Bosse, CEO, TrygVesta Group, Ballerup; Mr Henri de Castries, Chairman of the Management Board and CEO, AXA Group, Paris; Mr Patrick de Larragoiti Lucas, President, Sul America Seguros, Rio de Janeiro; Prof. Denis Kessler, Chairman and CEO, SCOR, Paris; Mr Patrick M. Liedtke, Secretary General and Managing Director, The Geneva Association, Geneva; Dr Stefan Lippe, CEO, Swiss Re Group, Zurich; Mr José Manuel Martinez, Chairman, MAPFRE SA, Madrid; Mr Andrew Moss, CEO, Aviva plc, London; Mr James J. Schiro, CEO, Zurich Financial Services, Zurich; Mr Donald A. Stewart, CEO, Sun Life Financial Inc., Toronto; Mr Patrick Thiele, President and CEO, Partner Re Insurance Co., Pembroke; Mr Mark Tucker, Group Chief Executive, Prudential plc, London; Dr Richard Ward, CEO, Lloyd’s, London. Secretary General and Managing Director: Mr Patrick M. Liedtke, Geneva. Vice Secretaries General: Prof. Gerry Dickinson (Insurance and Finance), London; Prof. Jan Monkiewicz (PROGRES), Warsaw; Mr Walter Stahel (Risk Management), Geneva. Heads of Research Programmes: Dr Christophe Courbage, Health and Ageing, Geneva; Ms Geneviève Reday-Mulvey, Four Pillars, Geneva. Head of Communications: Mr Anthony Kennaway, Geneva. Network Chairmen: Dr Bruno Porro (Chief Risk Offi cers), Zurich; Dr Kai-Uwe Schanz (Chief Communications Offi cers), Zurich. Chairman of the Communication Advisory Council: Mr Robert Hartwig, President, Insurance Information Institute, New York. Chairman of the Scientifi c Advisory Committee: Prof. Harold Skipper, Georgia State University, Atlanta. Former Presidents of The Geneva Association: Mr Raymond Barre, Paris (1973-1976); Mr Fabio Padoa, Trieste (1976-1983); Mr Julius Neave, London (1983-1986); Prof. Dr Dr e.h. Reimer Schmidt, Aachen (1986-1990); Sir Brian Corby, London (1990-1993); Drs. Jan H. Holsboer, Amsterdam (1993-1999); Mr Walter Kielholz, Zurich (1999-2003); Mr Henri de Castries, Paris (2003-2008); Mr Martin J. Sullivan, New York (2008); Mr Jacques Aigrain, Zurich (2008-2009). The insurance industry and climate change Contribution to the global debate The Geneva Association 53 Route de Malagnou, CH-1208 Geneva, Switzerland E-mail: [email protected] Tel: +41-22-707 66 00 Fax: +41-22-736 75 36 www.genevaassociation.org July 2009 © The Geneva Association Editor-in-Chief: Patrick M. Liedtke Editorial Managers: Susanne Le Roux and Françoise Jaffré The Geneva Reports - Risk and Insurance Research No. 2. The insurance industry and climate change – Contribution to the global debate Published by The Geneva Association (The International Association for the Study of Insurance Economics) ISSN 1662-3738 “As the economy and society have grown and developed, so too has the insurance industry; what began with marine insurance has expanded to encompass such risks as fire, natural disasters and automobile accidents. Global warming is a new risk which represents a clear business opportunity for the insurance industry. Today, I take the fact that the leaders of the world’s insurance companies are holding a conference on the topic of global warming as an indication of the industry’s resolve to actively contribute to the fight against global warming.” “I believe that it is when all the world’s players take part in combating global warming that we will be able to see results. And it is my hope that the financial industry, including insurance, will actively contribute by serving as an intermediary in the conveyance of funds and information for the different players involved in economic activity.” Shinzo Abe, former Prime Minister of Japan at The Geneva Association’s 36th General Assembly in Kyoto on 29 May 2009 Acknowledgements This fi rst report of the CC+I project, published as Geneva Report No. 2, was written by a working group of insurance executives and climate change experts, in the period between September 2008 and May 2009. The working group is chaired by Mr Kunio Ishihara, Chairman, Tokio Marine & Nichido Fire Insurance Company and Mr Michael Butt, Chairman, AXIS Capital Holdings Ltd. The CC+I Project is directed by Walter R. Stahel, assisted for the fi rst year by Ryoichi Nakai. They both coordinated the activities of the working group and the input to the report. We thank the following authors for their contribution: Ms Stine Bosse, Mr Mathieu Choux, Dr Eberhard Faust, Mr Kim Dyrhauge Hansen, Mr Hiroyuki “Rocky” Hata, Dr Celine Herweijer, Mr Anthony Knap, Mr Patrick M. Liedtke, Dr Robert Muir-Wood, Mr Trevor Maynard, Dr Michael Menhart, Mr Benedikt Rauch, Mr Andreas Spiegel, Mr Rolf Tolle and Dr Koko Warner. The report was copy-edited by Susanne Le Roux and Françoise Jaffré who also did the layout of this publication. Contents Foreword 1 The CC+I Project 1 Strategically situating the insurance industry 1 Monitoring the change 3 Working group and reviewers 4 Moving forward 5 Kyoto Statement of The Geneva Association 7 Customers 7 Policy-makers 7 United Nations Climate Change Conference (COP15) 8 Insurance industry 8 Chapter 1 The relevance of insurance to climate-sensitive economic development 9 1. Insurance and climate change: understanding a complex link 10 2. The intricate position of the insurer 10 3. Insurers as risk managers and experts 11 4. Insurance as a dynamic and tightly regulated industry 12 5. The size of the insurance industry 13 6. Insurance, capital and economic stability 15 7. Insurance, savings and risk spreading over time 16 8. The effects of insurance beyond the fi nancial dimension 17 9. Insurance as a knowledge industry 18 10. Insurance and behavioural impact 19 11. Conclusion 21 Chapter 2 Physical effects of climate change from an insurance perspective 23 1. Introduction 24 2. Weather, climate and climate change 24 3. What has been observed so far 28 4. Projections of future climate change from a regional perspective 31 Chapter 3 Impact of climate change on the world economy in a “business as usual” scenario 37 1. Introduction 38 2. Climate change impacts on physical, biological and human systems 38 3. Direct economic impacts of unmitigated climate change 43 4. Conclusion 46 Chapter 4 An overview of the response to climate change: mitigation and adaptation 47 1. Mitigation 48 2. Adaptation 55 3. Summary 59 Chapter 5 Insurance and climate change—from reaction to pro-action 61 1. Introduction 62 2. Insurance of climate perils 62 3. Insurers as stakeholders in reducing societal risk 63 4. Insurers as proactive players to reduce GHG emissions 65 5.