2 CATASTROPHE TRENDS Lloyd’s One Lime Street London EC3M 7HA Telephone +44 (0)20 7327 1000 Fax +44 (0)20 7327 5229 www.lloyds.com what next on climate change? “between the 1960s and 1990s the number of natural catastrophes doubled and insured losses increased nearly seven-fold... we must engage better together and that means insurers, business and government working together” Lord Levene, Chairman of Lloyd’s, speaking at the 360 Live Debate

www.lloyds.com/360 Lloyd’s is a registered trademark of the Society of Lloyd’s.© Lloyd’s 2006. what next on climate change?

3 360 Live Debate Highlights 11 Questions and Answers 20 News from Lloyd’s 24 Insuring a Sustainable Future  What Next on Climate Change?  What next on climate change?

More than 200 executives from the worlds of insurance, Business and the insurance industry need business, government and science attended the Lloyd’s to do more to address climate change 360 Live Debate this summer. Event attendees told us that business and the insurance industry must improve their risk models and disaster plans to keep pace In this report we share the views and opinions raised with reality. during the debate and ask what do we need to do next of attendees at the 360 on climate change. live debate say that the insurance industry Key items which emerged from the debate are: % isn’t doing enough to understand and manage 1 The seriousness of the issue for the insurance industry 84 climate change risk.

The need for each of us to take ownership and personal Climate-friendly behaviour is good 2 responsibility for climate change risk management The vast majority of event attendees are strongly aware of the Concern about whether climate change is high enough important link between climate-friendly behaviour and good 3 on the global political agenda, particularly in the US risk management practice. agree climate-friendly How understanding the impact of climate change can behaviour makes good give you a competitive advantage 4 risk management sense % – with the majority The need for longer-term strategies to deal with climate of these, some 55%, 5 change post-Kyoto 92 agreeing strongly. but there is more education and discussion needed However, it seems that the majority are not yet aware or perhaps not totally convinced of the full range of benefits which climate-friendly behaviour can bring to businesses.

agree that the benefits thanks & acknowledgements to a company of climate- friendly behaviour % outweigh the costs We wish to express our thanks to Sir Trevor McDonald for chairing the 360 Live Debate and the panel of experts; but of these only Lord Levene of Portsoken, Thierry Desmarest, Bill McGuire, Dr. Robert Hartwig, Wyn Jones and Johan Eliasch. 79 26% agree strongly. 89% agree that companies which take climate change We would also like to thank the following people and organisations who have contributed to this report: seriously have competitive advantage over their peers. London School of Economics Lighthill Risk Network, London David Way, Alexander Forbes Fraser McLachlan, WindPro Over the coming months, Lloyd’s will continue to drive forward the discussion on climate change, focusing on three specific areas. If you wish to comment on the issues raised in this report please contact: We will invest in research to better understand the impact of change on business and the insurance industry. We will take the Trevor Maynard debate to the US, Lloyd’s largest market, where we are now actively exploring how we can collaborate with other insurance [email protected] organisations to do so. And we will lead further discussion around some specific issues which have emerged as deserving closer +44 (0)20 7327 6141 attention, such as the benefits and competitive advantage to business of climate-friendly behaviour.  What Next on Climate Change?  The insurance view The media view lord peter levene sir trevor mcdonald

Lord Levene, Chairman of Lloyd’s since 2002, has top level Insurers need much better understanding of climate Sir Trevor McDonald is now well into his fourth decade of The role of the media is to continue to inform the debate experience in business and government. After working in the change risk trends television and is a British broadcasting icon. Born in Trinidad, For journalists, the debate about climate change has gone defence industry, he held government posts including Chief Fierce debate still rages about the extent and rate of climate he was the first black news anchor in the UK. He joined ITN on for quite some time now. It’s a debate about saving the of Defence Procurement and Adviser to the Prime Minister on change and its likely impact. This creates uncertainty and that as a reporter in 1973, rising to become a newsreader by the planet, destroying the planet, what kind of world we live in, Efficiency and Effectiveness. Business roles include Chairman in itself means greater risk. Insurers need to take action now to end of the decade. He presented the News at Ten bulletin what kind of world we’re going to bequeath to our children and of the Docklands Light Railway, Chairman and Chief Executive manage it. They need to invest more in research to understand throughout the 1990s and its successor, the ITV News at Ten grandchildren. This debate informs life and should stimulate of Canary Wharf, Chairman of Bankers Trust International and climate change better. They also need a deeper comprehension Thirty, until 2004. He was knighted in 1999. Sir Trevor also action. Every reasonably well-informed secondary school child Vice-Chairman of Deutsche Bank. He was knighted in 1989 of the financial impact of weather-related catastrophes. launched Granada Television’s current affairs programme today knows something about the Kyoto treaty. and became a life peer in 1997. He has also served as Lord ‘Tonight with Trevor McDonald’ to investigate and present the Mayor of London. Businesses need to prepare better for greater critical news stories of the day. He believes climate change is The fact that there are still conflicting views about catastrophe losses undoubtedly one of those issues. climate change should not deter us from action The statistics tell the story Underwriters need to price risk correctly and use more We know the United States did not sign up to the Kyoto Between the 1960s and the 1990s, the number of natural comprehensive modelling that reflects the latest scientific Climate change is the biggest story of our age Protocol. This is something I’ve discussed myself with President catastrophes doubled and insured losses increased nearly findings. Realistic disaster scenarios need to be continually Concern for the environment and climate change was the Bush. Some protagonists say there is indisputable evidence seven-fold. 2005 was the worst year on record for property reviewed. Climate change is rapidly transforming the nature story of the late 20th Century and it will continue to be the that there are perceptible changes in ice flows and ice levels at insurers, with claims of $83 billion (£44.8 billion). Hurricanes in and gravity of the risks that businesses bear and we need story of the 21st Century. We have been reporting for many the North and South Poles. In contrast, Senator James Inhofe, the US accounted for $66 billion (£35.6 billion) of this total. It’s to make use of the latest expertise to underpin our risk years on the debate about CO² emissions, greenhouse gases, Chairman of the US Senate Committee on the Environment and no coincidence that the ten warmest years on record have all management strategies. dramatic weather changes, melting ice sheets around the Public Works, describes global warming as “The greatest hoax been since 1990. Glaciers are melting and sea levels rising. North and South Poles and the effect that all this has on our ever perpetrated on the American people.” Whatever people planet. It is clear that none of us will be untouched by the think, it is indisputable that huge change is taking place. We Business is not doing enough to tackle climate change “there can currently be few impact of all these changes. need to ensure that this is properly discussed and understood. Last year, a survey Lloyd’s conducted with more than 100 issues of more significance global business leaders found that only one in four companies than that of climate change... had reviewed their risk management strategy as a result of “Al Gore describes global growing weather-related catastrophes. This is particularly worrying when it is considered that the economic cost of We must engage better warming as the thing that global warming could double to $150 billion (£80.9 billion) together and that means has the earth teetering on a year over the next decade. insurers, businesses the balance... and government working together.” Now, not everyone would agree with that; some people will think that is vastly exaggerated... But the changes are indisputable. There must be a continuing discussion because the issue is quite obviously very pressing.”  What Next on Climate Change?  The corporate view The Scientificview Thierry Desmarest Bill McGuire

Thierry Desmarest, Chairman and Chief Executive of French The answer to the climate change problem Bill McGuire is Benfield Professor of Geophysical Hazards at The Kyoto Protocol is having negligible effect energy group Total, began his career in 1971 as Head of the has to be global University College London and Director of the University’s If successful, Kyoto will result in a slowdown in the rise of Mining Directorate in New Caledonia and later worked as a It wasn’t unreasonable for the Kyoto protocol to give Benfield UCL Hazard Research Centre. He has published more global temperatures by 0.02C to 0.28C. That isn’t going to help Technical Adviser in France’s Ministry of Industry and Ministry developed nations most of the initial responsibility for than 300 papers, books and articles and his work includes a great deal and we must decide what comes after Kyoto. It has of Economic Affairs. At Total, he served as President of cutting emissions, but we need to see broader international looking at how climate change might trigger landslides, to have the US, India and China on board. The best hope is a Exploration and Production and Executive Committee member, co-operation if significant progress is to be achieved. earthquakes, tsunamis and volcanic eruptions. He was also a system called contraction and convergence, which works on the before rising to the top of the group in 1995. Five years later, The European Union accounts for less than 20% of global member of the National Hazard Working Group set up by the UK premise that everyone on the planet has the right to produce he led a two-way merger that saw Total combine with Fina emissions and this is likely to fall to barely 15% over the next Government to explore the feasibility of global natural hazard the same amount of greenhouse gas. A level is set for the planet of Belgium and Elf Aquitaine of France. Total has operations decade. Other nations need to contribute if the EU’s initiatives early warning systems. and it is divided by the number of people, so that each country in more than 120 countries and is the world’s fourth largest in binding regulation, emission caps and emission trading are knows how much it can emit per head of population. The overall private sector oil company. to make sense. Emissions growth in large emerging economies Business, government and individuals need to be level is then brought down by agreement. is soaring, with China and India expected to account for scared about climate change. Energy producers have a vital role to play in more than 20% of the global total in the near future. In In 2001, the Intergovernmental Panel of Climate Change Third meeting the climate change challenge addition, an international effort would have to include the Assessment Report forecast that global temperatures would With fossil fuels accounting for about 60% of man-made US, which already accounts for 22% but has not signed up rise between 1.4C and 5.8C by 2100. Worst-case scenarios greenhouse gas emissions and oil, coal and gas meeting more to Kyoto. It’s not realistic to expect the EU’s processes to be now envisage an 8C to 10C increase. than 80% of world primary energy demand, climate change extended worldwide in the short term but there needs to be is clearly closely intertwined with energy consumption. So strengthened international co-operation over the issue. In 2001, it was also suggested that sea levels would rise by up what can be done to protect the climate? Increasing energy to 88cm by 2100, but more recent studies suggest a far more efficiency has significant potential to help in the short-term. Technology will provide some of the answers rapid increase. Customers have to be encouraged to use energy more Technological developments have much to offer in improving responsibly. Housing, urban planning, regional development fuel economy, enhancing emission processes, making Global warming is going to be much, much worse than and transportation policies could support this effort. Energy renewable energies more competitive and reducing the cost of experts expected supply could also be diversified by exploring alternatives such capturing CO². However, there are also critical political issues Total ice lost from the Greenland ice sheet has more than as wind, solar and biomass energy. With time, the roles of such in giving a cost to carbon emissions. How can we persuade doubled in the past decade. A total melting of the sheet would energies will expand but we can’t expect them to do more people to radically transform the way they use energy? The lead to a 7m rise in global sea levels. Only a year ago, the than they are capable of. man on the street doesn’t seem very concerned but, as the timescale for such a rise was being measured in thousands climate problem worsens, the issue will move to the top of of years. Now it’s being seriously talked of in hundreds of the agenda. Swift global action is needed. years, if not less.

Global warming also threatens the Gulf Stream, which keeps “There might be major the UK several degrees warmer than comparable latitudes adverse consequences for such as Labrador and Eastern Siberia. Last December, the Southampton Oceanography Centre published evidence for agriculture, ecosystems, a 30% reduction in the gulf stream’s circulation since 1992. biodiversity and lifestyles... If the weakness persists, we might expect a 1C fall in UK and “In the decades ahead, Western Europe temperatures over the next ten years a major problem in the or so. This is the difference between today’s climate and that climate change will come to coming decades will be of the Little Ice Age between the 15th and 19th centuries. dominate everything in our lives; everything we do... balancing the continued use Climate change will mean more natural hazards such of large amounts of oil, gas as windstorms, floods and hurricanes Even if we act now to and coal with a reduction in We may already be seeing that. It’s a climate change signal. Warmer sea surface temperatures are triggering more drastically curb emissions, carbon dioxide emissions.” powerful hurricanes and tropical cyclones worldwide. things are going to be bad. If we do nothing, they will be far, far worse.”  What Next on Climate Change?  The us view The industrial view Dr. Robert Hartwig Wyn Jones

Dr. Hartwig is Senior Vice-President and Chief Economist for But the impacts and benefits of most other environmental Wyn Jones is Chairman of British Alcan Aluminium, part of the “The good news is that the New York-based Insurance Information Institute. Previously causes that Americans are concerned about are much more multinational company Alcan Inc. He plays an important role in Director of Economic Research and Senior Economist with immediate, obvious and local to them than global warming. Alcan’s global team on renewable energy and climate change, startling improvements the National Council on Compensation Insurance, Senior as well as participating in several business and government are possible and they are Economist for the Swiss Reinsurance Group and Senior Some American scientists are deeply sceptical panels. He is Chair of the Confederation of British Industry’s relatively inexpensive once Statistician for the United States Consumer Product Safety about climate change Energy Policy Committee and interacts with government on Commission, he is perhaps America’s best-known general Dr. William Gray, a renowned US hurricane forecaster, has climate change issues including through the Gleneagles Dialogue. the problems are realised insurance industry spokesman. asserted that the notion that the intensity and severity of and tackled... recent hurricanes has anything to do with global warming Industry is part of the climate change problem America is deeply divided over whether climate is “ridiculous”. He believes it’s instead part of a normal Industry accounts for approximately 21% of global emissions The bad news of course is change is happening oscillation dating back many centuries. His view is shared by of CO² gases so it’s part of the problem and the recognition of that the consumption of There are the true believers like Al Gore and the true the National Oceanographic and Atmospheric Administration, that is patchy. Consumption of materials is growing in the UK disbelievers like Senator Inhofe, a Republican from the the US government’s own weather service. Groups that argue by 2% to 4% a year. In the developing world it’s a really major industrial products energy-intensive state of Oklahoma. Clearly, the issues of that there is a direct link between rising concentrations of issue. It’s very difficult to persuade emerging economies that is growing.” global warming and climate change are caught up in a political greenhouse gases and specific events like Hurricane Katrina they shouldn’t industrialise and aspire to the things that the and economic maelstrom from which it will be very, very are probably hurting their own cause and alienating some developed world already has. difficult to escape. There is significant opposition to restrictions allies within the scientific community, who point out quite on greenhouse gas emissions among many US politicians. correctly that no precise statistical association can be made. Industry is also part of the climate change solution Very often these politicians hail from states and districts that Innovation has a very major role to play. Industry can be part perceive that their own economic interests would be harmed Most US business leaders perceive green causes of the solution by producing products that use less energy, by limitations on greenhouse gas emissions. as anti-business that help with the adaptation to climate change and assist with This is particularly the case in the manufacturing and energy other issues such as climate-related diseases in developing Most Americans are largely uninformed about sectors. Many US business leaders have opposed green issues countries. We have to look at the consumption of CO² and the the debate on global climate change on grounds that they would raise costs, make their products way we design goods. The vast majority of Americans are dispassionate, uninformed uncompetitive and ultimately result in job losses. Some and unconcerned about climate change. The average second companies have embraced a green concept but others are The idea that industry doesn’t care about climate grader in the US doesn’t know about the Kyoto Protocol. moving that way because it can make them more profitable. change needs to be put to rest It’s not obvious to most Americans why global climate Higher energy prices have probably done more to help control UK smelters are looking at a reduction of CO² equivalent change is any more important than any other environmental greenhouse emissions in the US than just about anything else emissions of 65% in absolute terms. The Kyoto target was cause. Americans are becoming more concerned about over the past two years. 12.5%. Progress is possible. In the time we made that environmental issues like clean water, air and land, reduction, we increased our output by some 20%. We can have deforestation, protection of wildlife and open space. competitive industries and partly drive those by improving our carbon performance. The cement industry has set itself a 26% reduction in CO emissions from 1990 levels. “While the rest of the world ² has signed onto this debate, Industry and government need to work together Four major things need to be addressed. Firstly, a way needs within the United States to be found of installing the best technologies in emerging itself, the debate is very, very countries. One new power station a week in China is being active indeed... built on coal and that needs to be the best technology. We have to find a way of transferring the best technology from the West whilst rewarding it’s development. There’s a role for the It shows no sign of being World Bank in that and possibly a role for insurance companies climate change agreements and global sectoral agreements. settled within the US too. Secondly, products need to be designed that are resource- The cement or aluminium industry could get together scientific community, and efficient, whilst satisfying the needs of customers. We need and form an agreement to develop technology and share to look at environmental labelling. We also need intelligent that knowledge across the whole global sector. We need certainly within the political regulation that speeds up innovation, rather than acting as a recognition that stable economies and wealth creation are community, anytime soon.” barrier and we need to work together with governments on required if the effects of climate change are to be reduced. 10 What Next on Climate Change? 11 The individual view the debate Johan Eliasch The debate was opened up to the audience and the panel faced a series of probing questions in a lively session moderated by Sir Trevor McDonald.

Johan Eliasch is Chairman and Chief Executive of Head NV, a It has direct relevance to the insurance industry leading global manufacturer of premium sports equipment. You can see correlation between the degree of deforestation He is also Deputy Treasurer of the Conservative Party in the and the veracity and intensity of hurricanes. What we can UK and Chairman of Equity Partners Group, an investment do is to attach a fair value to those environmental assets group with interests in various industrial sectors. Last year, this that are critical to global climate stability. The contribution of former world championship skier acquired 400,000 acres of land use change to global warming comes entirely from the Amazon rainforest and the interest that this generated has led developing world where a combination of shifting agriculture him to be a key figure in a proposed scheme, backed by the and engrained poverty is doing as much to destabilise climate UK Government, to protect the Amazon rainforest. The scheme as the US and China combined. The fair value for those aims to protect the plants and wildlife of the Amazon from environmental services in rainforested areas by far exceeds logging and would involve the creation of an international body the land values. By way of example, at prevailing prices the to buy the rainforest before setting up a trust to sell the trees. Amazonas rainforest hypothetically is valued at £50 billion which is far less than what the insurance industry paid out We know about the problem so let’s look for solutions last year for hurricane related losses. Another example of the I made this purchase, because when I grew up in Stockholm distorted capital value paradigm of the environmental services I could ski from October to April. Nowadays you’re lucky if provided by the rainforests is that (in theory) if the UK spent £12 you get one or two days skiing a year outside Stockholm. The million to acquire rainforest for preservation it would meet its reason is global warming. I thought of the various solutions entire Kyoto reduction target - for almost nothing! and having analysed it, it was pretty obvious – buy rainforest in the Amazonas with the objective of protecting and preserving Kyoto has not achieved very much it. Illegal burning and logging in the Amazonas each year takes The reduction targets are in a lot of instances pathetic and the out a land area almost the size of Switzerland and accounts US, India and China have not signed up. The biggest benefit for almost 2 billion tonnes of CO² emissions, which is more than of Kyoto was that it increased awareness. But we need a new the entire Kyoto reduction target over the period and about protocol. Not in 2012, but now. Otherwise, we’re just delaying 8% of total CO² emissions globally. Deforestation accounts the inevitable. for a staggering 20% of global CO2 emissions. Avoiding deforestation is by far the easiest and immediate way to Climate change is the most important issue we face combat climate change without impairing economic growth It’s a serious problem. The issue is no longer Iran, Iraq or and development. weapons of mass destruction. It’s about the fight against climate change. It needs to be at the forefront of the global agenda. We need governments, businesses and people working together to achieve a solution. What I did maybe a start towards a solution. But more importantly, I hope it will accelerate the combat against climate change.

“If everyone joined forces in protecting and preserving the rainforests, we could immediately deal with the Kyoto reduction target and reduce the insurance industry’s losses significantly.” 12 What Next on Climate Change? 13 the debate

The man in the street does not necessarily see climate change as a problem with which he needs to engage. How can industry and government address that without turning to propaganda? David Stanforth, Research Fellow, Oxford University

Thierry Desmarest: “We must simultaneously come up with Dr. Robert Hartwig: “People tend to think very, very locally concepts and solutions that concern the citizens themselves. about environmental issues. On the other hand, if at a young In Europe, for instance, with the price of gasoline, people are age you instil in children some sort of sense of responsibility looking at their consumption and for the first time in the first for their environment locally, as they grow older and their half of this year, the consumption of gasoline and diesel in financial means grow, they tend to naturally extend that most European countries is lower than it was in the previous interest to a national and perhaps even international level. years. It’s the case in the UK, Germany, France and Spain. There We need to encourage people to belong to local organisations. are other areas where we could have programmes which That kind of movement can grow and in aggregate have an could help customers focus on the issue impact on greenhouse gas emissions. Even people who will of climate change.” not profess to be environmentalists will dig in their heels and open up their wallets to preserve a wooded area near where they live. A local approach is very, very effective.”

What opportunities are there for business to profit from climate change? What will it take to encourage businesses to have this attitude? Keith Lawrence, Senior Environmental Economist, Jacob Babtie

Wyn Jones: “If you do things that are right in relation to Bill McGuire: “It has always been thought that climate change climate change, you will improve your business, whether that is going to cost global society but a study has been undertaken is energy reduction or managing your production processes recently that suggests that the planet’s GDP might actually more effectively. There are tremendous ways that the UK can increase as a result of us tackling climate change. This is not make money by addressing climate change. We have the best only because of making industry more energy-efficient but technology base and materials in the world, bar none, but we because of the huge renewable energies market. Tackling have not been very good at getting innovations to market. climate change doesn’t have to cost money.” Through the Materials Innovation & Growth Team, we’ve put together a knowledge network to deliver that. There are opportunities, there is money to be made and industry can adapt.” 14 What Next on Climate Change? 15 the debate

Will the rise in sea levels lead to an enormous How do governments and business talk to one increase in either volcanic eruptions or earthquakes? another internationally about emissions trading? Jill Mandeno, Member of Lloyd’s And how do you actually trade these emissions, given that these are practical schemes with real-life Bill McGuire: “If we look back in time, we can see over the financial implications? last 10,000 years periods when sea levels have been rising Simon Webb, The UK Department for Transport and International Transport Forum very rapidly. The added weight of water around the planet’s plates seems to be correlated with increased volcanic activity. If we are going to see a sea level rise of maybe 7-10 metres Wyn Jones: “There’s a sort of Chinese wall between industry Thierry Desmarest: “Up to now, the system has worked over a period of few centuries, we might see more geological and ministers but for all of that it works very well. There’s without too many problems but we have a concern for the hazards as well as more meteorological hazards.” probably more flow from industry towards government, medium term. If the penalties become too huge, it would be rather than back again, but this is now going into a new more reasonable on pure economic grounds for a company to evolution and we’re rather hopeful that ministers will feel stop its plants for the last two weeks of the year than to pay more confident that we’re not nasty old industrialists and they the penalty. Clearly, we still have some adjustments to make Have you discussed global warming with oil will open up a little bit and enter into a two-way dialogue on to this scheme.” policy. I think it’s an extremely productive process because companies in the us? Why do you think there is a governments are by and large really unable to deal with this. difference in opinion on global warming between It’s such a hot potato for them because voters are consumers major European oil companies and their US and consumption is increasing.” counterparts? Tom Bergin, Correspondent with Reuters Will Western companies continue to bang the climate change drum when they see that their competitors Thierry Desmarest: “Generally speaking, we’re not allowed Dr. Robert Hartwig: “Occasionally I speak to these groups. to consult with other oil companies because of past practices. I would have to say that the issue of global warming and global in China and India are becoming more profitable as In the US, things have moved substantially in the last ten years, climate change is not at the top of their agenda.” a result of not having to comply with some of the and I think that will accelerate.” emission limits in Europe? Jacqui O’Keeffe, Simmons & Simmons

Johan Eliasch: “A lot of European manufacturers have moved Bill McGuire: “It’s an interesting question whether companies their manufacturing to China. But if we look at the population will simply up sticks and move wholesale to another part of the in China and India, it’s really important that we encourage planet where there is no restriction on emissions. But China those governments to start educating people at a grass roots and India and other developing counties whose economies level to think proactively about emissions. As somebody are growing very, very rapidly realise they’re going to be hit who has moved manufacturing over there, I am asking the particularly hard by climate change. They’re aware it’s going to question: ‘what are you doing about these emissions and be a problem for them so I don’t think it’s going to be a free-for- about pollution?’ It’s about a combination of awareness and all in these countries. I think they’re going to have to participate involvement of the corporate sector and that’s somewhat in whatever follows Kyoto. They’re going to have to have lacking today because a lot of us move manufacturing over emissions caps there so companies cannot get out of things there and sort of move the problem with it.” by moving from Europe to China or anywhere else.” 16 What Next on Climate Change? 17 the debate

JM Keynes once said that the difficulty in changing any enterprise is not in developing new ideas but in escaping old ones. So which old ideas do we need to “What I would like escape to tackle climate change? Alex Nickson, Climate Change Adaption Strategy, Greater London Authority to see is that each

Dr. Robert Hartwig: “In the US, there’s a sense that the Bill McGuire: “Unsustainability: the idea that we can throw of us should be government really should have no control over anything away things or use them once and then get rid of them.” that I do, whether that is a choice about what sort of vehicle I drive, the size of home I build, or where I can live. These sorts of issues create problems in terms of inefficient energy responsible for consumption but also increase the vulnerability to the ultimate consequences of climate change. The irony here is that many people will say: ‘do not ever tell me where I can live and our own carbon what kind of structure I can buy but you had better subsidise me when I do it’. They have become accustomed to being completely able to determine where they live and in what sort of structure and have also become totally habituated to footprint. All it government subsidies which enable this. So, if we were to eliminate this sense of entitlement to government subsidies, that would have a tremendous impact.” takes is to preserve a

Could we ever see someone being sued for causing tree in the rainforest. climate change in the future? Lucy Toland, Association of British Insurers It’s not much.” Johan Eliasch, Chairman and Chief Executive of Head NV Johan Eliasch: “If we look at the Kyoto Protocol it is vague, Dr. Robert Hartwig: “Certainly when we think about the and it does not make nations properly accountable for failing US court system, which is a disaster, just about the worst on to achieve agreed CO² emissions reduction targets. We need earth, it would be awful. It would be asbestos ten times over if accountability. What I would like to see is that each of us something like that were to happen. So clearly there needs to should be responsible for our own carbon footprint. All it takes be a better way to resolve this than through the legal liability is to preserve a tree in the rain forest. It’s not much.” system; the legal liability system is absolutely positively not the way to do it. I think we could probably avoid this because it’s clearly not in anyone’s interests”

¹ The state of California filed a lawsuit against six leading car manufacturers on 20 September 2006. The state is suing the carmakers for damages related to greenhouse gas emissions. The federal lawsuit alleges that emissions from their vehicles have harmed Californians’ health, damaged the environment and cost the state millions of dollars to combat its effects. 18 What Next on Climate Change? 19 the debate

We hear this figure of 550 parts per million as the One of the criticisms about the Kyoto Protocol is sort of thing we should aim for. Is this something that it stops in 2012. What date would industrialists that people can psychologically aim for? Because like the next agreement to extend to in order to help it seems to me that this is double the pre-industrial them work effectively? amount of carbon dioxide in the atmosphere. It seems Andrew Dlugolecki, Consultant on Climate Change and Insurance a rather dangerous figure to be aiming for. Stephan Harrison, Geography Archaeology and Earth Resources, University of Exeter Wyn Jones: “The general industry view is that they’re looking Thierry Desmarest: “The main problem is not that the for a 15-year period, approximating to investment cycles in second period is stopping in 2012. The real problem is the heavy industry. I think the better answer is that it certainly fact that the Kyoto Protocol is being applied by too small a Bill McGuire: “I’ve always wondered where this figure came Wyn Jones: “Trying to make a judgement on what’s shouldn’t be a short period. I don’t think it’s the right way of geographical area, which represents a small percentage of from. It does almost seem to have been picked out of a hat. acceptable in this area is just not the right thing to do in my looking at it because it just pushes the problem into the future. global emissions. The real problem is to adapt Kyoto to a larger There’s clear concern that it might not be sufficiently low to view, simply because we can’t predict with any degree of We need to have an ongoing continuum of target-setting.” agreement that can apply to a larger number of countries.” prevent dangerous climate change. I hope we don’t get lulled certainty what the consequences will be. History says that if into a false sense of security and regard it as a limit we need you’re aiming for something you generally miss it.” to aim at.” How responsible is the worldwide media being in covering mostly doom and gloom stories and also in How can the science community best work with still being rather suspicious of industry? industry and partners to deliver climate Benedicte Paviot, BBC World Service TV France change solutions? Phil Johnston, Hadley Centre of Climate Change, The Met Office Johan Eliasch: “When there is a natural disaster, do you see Dr. Robert Hartwig: “In the aftermath of Hurricane Katrina, on the front page of The Times a headline saying that if we don’t the media didn’t say that global warming is the cause of stop global warming then this is going to happen again? No, Katrina and that would probably have been an irresponsible Wyn Jones: “In the materials industry, which represents 15% Thierry Desmarest: “Another example is that there are that’s not the case. The story is always that we had this disaster thing to say. But what they did say was that the Bush of UK GDP, we’ve got together with the science community. different regulations in different areas of the world. We want to and so many people died. I believe that this link between administration had failed the American people and that the We have a knowledge transfer network which covers all the have a common policy everywhere. We want to have the same poverty, global warming and natural disasters is something levies around New Orleans were defective and need to be built material bases in the UK; we put them together into one body. standards everywhere in the world.” where the media could do the world a great service in reaching higher, stronger and faster. So no matter what the outcome We’re looking at connecting up the scientific assets in the UK out and informing people. Through education and gaining more of the global warming debate, you have forced the political to make sure they’re used effectively and then we have an knowledge, we could actually do something about it.” types in the country to spend more money and it’s going to be industry-led organisation which is working in task groups to an ever-increasing sum to try to defeat the forces of nature. look at market-driven solutions and pulling innovation and Whether those forces are associated with global warming and technology through with it. We’re looking to accelerate the hurricanes, or whether they’re associated with seismic risks, speed of innovation by connecting it to markets. I think it’s an spending more money to defeat the forces of nature is where exciting opportunity for the UK.” we’re headed in the United States.” 20 What Next on Climate Change? 21 What next on climate change? a brief update from lloyd’s

New climate change team established at Lloyd’s Redressing the balance in the Garden of Eden This was used as an allegory for collective and interdependent Trevor Maynard has been appointed to the new role of Lloyd’s is also helping to highlight the importance of the action to protect and maintain the natural balances of Manager of Emerging Risks at Lloyd’s, which will include climate change issue abroad and sponsored an event held the environment and illustrate how British companies are leading on the key issue of climate change. A member of by the British High Commission in Singapore for 500 political, committed to environmental issues. Lloyd’s Exposure Management team, he will now oversee economic and business leaders attending the International the market’s efforts on preparing for and managing climate Monetary Fund/World Bank meetings in September. Companies were asked to identify their relevant corporate and change risk. “The fact that we have established a new team social responsibility initiatives and these were crafted into the demonstrates that Lloyd’s is taking climate change seriously,” Entitled ‘Garden of Eden? Redressing the Balance’, the allegory of the Five Elements Theory through light, sound and he says. He will also work with companies operating in the event was themed around the need for collective action to a visual display within the stunning natural setting of the Eden Lloyd’s market to communicate developments to them and redress the effects of climate change. Instead of portraying Hall house and garden. spread best practice. globalisation as something controversial, it was highlighted as a positive force, enabling nations to work together to maintain Susan Zajac, Lloyd’s representative in Singapore says: Lloyd’s funds new research posts in climate change a balanced environment. “The theme was chosen by the British High Commission to For the first time, Lloyd’s is funding a small number of PhD encourage, support and promote ethical environment business posts specialising in climate change, as part of its efforts to The event was based around the Taoist belief of the Five practices which collectively will make a difference to the be at the cutting edge of the latest climate change research Element Theory of an interdependency cycle in which water environmental challenges that are facing us all.” and thinking. One of the posts involves working with “Lloyd’s is keen to learn how nourishes wood, wood generates fire, fires produces ashes Professor Lenny Smith at the London School of Economics which fertilise the earth, earth yields metal by extraction and and Political Science (LSE) and will look specifically at how others are preparing for metal becomes liquids when melted. well mathematical models of the climate compare to the real climate change and to share Hillary Benn, International Development Secretary, world; and what decisions the insurance industry could make its findings. This is an issue UK Government, by the Lloyd’s stand at the ‘Garden of Eden? based on them. Ideally, the project will contribute to two-way Redressing the Balance’, event communication, feeding information back to climate scientists where the financial services on how to improve their modelling strategy to better support and wider industry must decision makers. Lloyd’s aim is to increase the industry’s work together.” understanding of climate models so that underwriters can Trevor Maynard, Manager of Emerging Risks, Lloyd’s better understand the risks of climate change and prepare You can contact Trevor on +44 (0) 20 7327 6141 or [email protected] for them. Lloyd’s is also currently in discussion with other University’s about funding further PhD posts.

Lloyd’s forms key partnerships on climate change Lloyd’s has become a core member of the Lighthill Risk Network, an academic network that has been established in response to the need for greater technical assessments of the increasing risks facing insurers. Bringing together the worlds of commerce and scientific research, the Lighthill Risk Network aims to play a dynamic role by acting as a “global brain” tapping into a worldwide network of people at the forefront of risk.

“We are trying to make sure that information on increasing Change Partnership, an initiative backed by the Mayor of climate change risks gets to the insurance market quicker,” London to encourage the Financial Services industry to build says Trevor Maynard. “This network puts us in touch with adaptation to climate change into its day to day business some of the leading experts on the subject. The aim is to planning. Trevor Maynard is also chairing a working party facilitate and enhance knowledge transfer into insurance on climate change at the Institute of Actuaries. “These from academic, government and professional experts at the partnerships are very important for Lloyd’s,” he says. “Lloyd’s forefront of risk-related research, including climate change.” is keen to learn how others are preparing for climate change Lloyd’s is also active on a number of other important fronts. and to share its findings. This is an issue where the financial It is a contributor to the finance group of the London Climate services and wider industry must work together.” 22 What Next on Climate Change? 23 What next on climate change? Lloyd’s carbon footprint Lloyd’s is committed to leading the debate about climate change in the insurance industry and knows that action has to start at home. With just two main business locations in London and Chatham, Lloyd’s direct environmental impact is relatively low. However, we believe that it is important to lead by example, and we are therefore working to reduce this impact. Lloyd’s put a formal environmental policy and action plan in place in 2004, as part of its wider Corporate Responsibility policy.

“Sustainable design aims to meet present needs without compromising the stock of natural resources remaining for future generations. In terms of buildings, it implies resource efficiency – minimum energy, flexibility and long life.” Lord Richard Rogers

The Lloyd’s building – ahead of its time Looking to the future Fidentia House – designed to save energy Recycling The distinctive Lloyd’s building in the City was designed by Lloyd’s recently invited the Carbon Trust to undertake an audit Lloyd’s new office building in Chatham, Fidentia House, will be “Everyone knows that reducing waste is good for the the Richard Rogers Partnership, with energy efficiency firmly of the London building’s energy usage and following this work home to 180 staff moving from nearby premises. A brand new environment. What most people don’t know is that solid waste in mind. Air is extracted from the building, passed to the we will be implementing further improvements in 2007. building, it is expected to receive a high rating by the Building reduction and recycling help address global climate change. perimeter of the building and forced inside triple-layered The energy usage for the 2005/06 period was 28,151,077 Research Establishment, which rates properties on factors How? By decreasing the amount of heat-trapping greenhouse glazing, ensuring almost zero heat loss from the offices during Kilowatts an hour, which equates to 9,977 tonnes of carbon including management, use of energy and land, materials used gases that are linked to everyday trash.” US Protection Agency winter and reducing heat gain during the summer. Heat from dioxide emissions. Lloyd’s set resource reduction targets for in construction, water consumption and pollution. the return air is collected in the basement sprinkler tanks and the first time in 2006 for electricity, gas and water. Lloyd’s is Lloyd’s has been working hard to improve recycling across its re-used. The internal concrete slabs are heat sinks, absorbing now actively exploring ways to reduce its carbon emissions in Energy-saving features include: two sites, which has resulted in a 50% reduction in waste going heat during occupation and being cooled off overnight using 2007 and beyond with help from the Carbon Trust. to landfill over the last two years from the Lloyd’s building naturally chilled night air. This allows cooling to follow a Lighting controlled by occupancy sensors in London. We set a new target to increase the amount we 24-hour cycle and reduces the peak cooling requirement. Recommendations from the Carbon Trust to be implemented 1 recycle at the Lloyd’s building in 2006 by 5%. in 2007 include: However, new initiatives have been introduced in recent years High frequency fluorescent lights Through environmental initiatives, employees are encouraged to further improve energy efficiency: Reducing energy consumed by the air conditioning 2 to reduce usage of resources and to recycle wherever possible. 1 system by using new technology that varies the Recycling bins are now sited throughout the Lloyd’s building. Boiler controls have been replaced with the latest digital speed of the motors instead of varying the air flow using Ventilation fitted with heat recovery system Last year, the Lloyd’s building recycled 111 tonnes of paper, 1 equipment to ensure more efficient fuel usage and cleaner dampers. Reducing the speed of the motor by 20% will 3 glass and cardboard. By the end of the year we will also launch exhaust products result in a reduction of 50% in the energy consumed facilities for recycling plastic cups. Variable speed drives fitted on the heating Variable speed drives have been installed on chiller pumps Improving the energy efficiency of the boilers by using 4 and cooling systems In 2007 further improvement will be made by introducing staff 2 to reduce energy consumption 2 oxygen trim. Oxygen trim monitors the air to fuel ratio collection points for glass, aluminium and cardboard on each floor. in the boiler and optimises the amount of energy needed ‘Best Practice Guidelines for the Environment’ have been to operate the boiler. It continually adjusts depending on Localised heating for stairwells with time and As part of the Greener Lloyd’s campaign, Lloyd’s has launched 3 issued to employees, including energy efficiency suggestions the level of oxygen to gas ratio. 5 temperature controls an informal network of environmental champions to act and keep colleagues up to date on the latest environmental initiatives. A network of ‘environmental champions’ from across Reducing the temperatures that the boilers run at during the 4 the business meets regularly to discuss ways to improve 3 night and at the weekends, this will save 372 kilowatts an Lloyd’s is also now working with its suppliers to improve environmental performance and disseminate ideas and hour of gas which equates to 71 tonnes of CO² per annum environmental initiatives in their own operations and has made information back to their teams arrangements with Avenance, a catering supplier of Lloyd’s, to recycle all glass from the kitchens, restaurants and meetings in London.

We are also reducing the need for paper in the market in the first place by making it possible for documents to be transferred electronically. 24 What Next on Climate Change? 25 What next on climate change? insuring a sustainable future Climate change, as well as rising power prices and fears over the security of supply have highlighted the need for renewable energy technologies. Lloyd’s underwriters and brokers are playing a vital role by helping provide the insurance cover needed. waste to energy “Waste to energy plants tend to be small projects costing Waste to energy plants are a source of renewable energy. around £10 million to £15 million ($18.5 million to $27.8 million), They burn household and industrial waste to give off gas and compared to the £300 million ($556.8 million) cost of replacing “waste to energy is generate electricity. The waste can be anything from chicken a power station,” he says. litter to food manufacturing waste. “We are covering engineering risks and industrial energy risks. The size of the market is currently small but, with local It requires a degree of skill and good understanding of the a rapidly growing authorities working to meet government targets for recycling technologies involved.” and less reliance on landfill sites, waste to energy is a rapidly growing market. In five years time, it is expected to be a major Mr Way says insurance plays a vital role. “A lot of waste to market. In five years element of the renewable energy business. energy plants are funded through Private Finance Initiative projects or public-private partnerships,” he says. “Where there Like all energy plants, there are risks involved. Waste to energy is a debt element in the funding, the banks and debt providers plants need insurance and Lloyd’s is one of the major providers, will require insurance cover in order for the funding and the time, it is expected to accounting for about one-third of this specialist market. project to proceed.” David Way, a Director of Energy for Alexander Forbes, says cover “Lloyd’s accounts for about one-third of the waste to energy be a major element starts with construction and property insurance for the plants insurance market. This is exactly the kind of specialist cover themselves but can also include revenue and liability cover. that Lloyd’s excels in. There are not many places in the world you can go to for this kind of cover. Lloyd’s is one of them.” of the renewable Typical case study: ABC Energy¹ intends to install a nominal six megawatts waste to energy power plant in Wales. The project will convert commercial trade waste into a synthetic gas to power a gas engine. The engine will drive a generator to produce electricity for export to the energy business.” local electricity grid network. David Way, Director of Energy, Alexander Forbes

Waste will be pre-prepared and delivered by third parties and stored on site. The fuel will require secondary drying. From the dryer it will be fed into the gasifier where it is combusted in an oxygen-starved environment to convert to synthetic gas. The gas is cooled and pressurised then used to fuel the gas engine.

The costs of design, manufacture, supply, delivery, installation, testing and commissioning is £14 million ($26 million) and the project will take ten months to complete.

The insurance needs will fall into two periods: construction and operation. During construction, the contractors will need £14 million ($26 million) of construction all-risk cover. There will also typically be £3.5 million ($6.5 million) of insurance for delays and £15 million ($27.8 million) of liability cover. Once the plant is operational, it will typically need £14 million ($26 million) of property cover, £3.5 million ($6.5 million) insurance for loss of revenue in the event of a fire, wind storm or other event that disabled the plant and £15 million ($27.8 million) of liability insurance.

¹ A fictitious company name has been used for this case study. 26 What Next on Climate Change? 27 wind energy WindPro. “Then it needs liability cover, which can be anything Wind energy is another major renewable energy initiative up to $100 million (£52 million) in the US.” WindPro has where Lloyd’s leads the way in providing specialist insurance provided cover for more than 10,000 megawatts of the 40,000 cover. WindPro, the Lloyd’s consortium of syndicates specialising megawatts generated from wind power worldwide. It can in this area, was established in 1999 and now has a 25% share be accessed directly or via an insurance broker and has the of the global market. capacity to provide limits up to $470 million (£250 million) on any one project. “The biggest market is Germany, followed Projects range from sites with a single turbine to major wind by Spain, Denmark and the US,” says Mr McLachlan. “The UK farms with 100 to 200 turbines. Turbines range in cost from market is mainly offshore-focused. Other sizable projects are about £100,000 ($185,000) for the very smallest to as much in Ireland, Portugal, Greece and Italy, while Australia is also an as £2.5 million ($4.6 million). Therefore a large installation emerging market for wind energy.” can need total insurance cover of up to £250 million ($464 million). The cover includes the transportation of the plant to Lloyd’s WindPro consortium also enables an integrated its onshore or offshore location, construction, operating risk approach as it covers both onshore and offshore wind energy cover, liability, delay in start-up and business interruption. “A projects. “It’s unusual to cover both types as normally they sit typically-sized wind energy project of around 30-40 megawatts in different markets - offshore energy and onshore property,” “WindPro has needs insurance cover of about £25 million ($46 million) for says Mr McLachlan. “What makes us unique is that we can the replacement of the equipment,” says Fraser McLachlan of deliver all wind energy insurance needs in a single package.” provided cover Case Study: Scottish Power Scottish Power is one of WindPro’s biggest clients and has a portfolio of wind energy projects, including sites in the US. The company has been striving to operate its own wind energy projects, in addition to its conventional power stations, as it for wind power positions itself in the changing global energy market.

“Any one of Scottish Power’s wind energy projects in the US has a value of up to $300 million (£157 million),” says Mr McLachlan, “so these are much bigger sites than in the UK, where values would typically be £10 to £20 million ($18 to $37 million). If you add worldwide. The Scottish Power’s wind energy assets together, it would come to more than £500 million ($945 million).” Mr McLachlan believes Lloyd’s offers Scottish Power a number of advantages. One is the breadth and scope of the cover provided. biggest market is The second is the flexibility that comes from a marketplace with insurance licences all over the world.

“Lloyd’s has licences is so many different territories so it makes it much easier for a major power company to deliver wind energy projects in various different locations,” he says. “We are the only provider of wind energy insurance ‘from cradle to grave’. Germany, followed

You can buy wind energy insurance from other providers but no-one has got the capacity in the market that we have got. We could insure $500 million (£260 million) for one project whether it is onshore or offshore. Typically we would take on the entire risk. by Spain, Denmark That’s what makes WindPro at Lloyd’s unique. No-one in the world does anything like this on the same basis and to the same scale.” and the US.” Fraser McLachlan, WindPro 28 What Next on Climate Change?

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