The changing world of insurance

With over 20 years' experience, Andrew Dlugolecki is one of the top UK experts in climate change issues and insurance. He was there from the beginning, when scientists and insurance industry honchos first came together to look at what he remembers as "this new thing called climate change."

Dlugolecki, visiting research fellow at the climate research unit of the University of East Anglia, is upfront about what exactly insurance brought to this new field of work: "There was a lot of uncertainty (about the impact of climate change) and the scientists had no idea what it would cost. We could say, 'well, if storms become that much wetter or that much stronger, our experience would say how much it would cost.'"

Achievement

Dlugolecki's initial work led to his becoming chief author for the Intergovernmental Panel on Climate Change, where he ended up sharing a Nobel Peace Prize (although he is disappointed by his certificate's slightly wrinkled arrival from Sweden). He also produced the Chartered Insurance Institute's first two reports on climate change in 1994 and 2001 and is heading its next project. And he has a clear idea of what brokers can bring to this issue.

"Brokers have a much more direct relationship with clients than insurers, other than direct insurers," he says. "They can communicate the reality of the risks to try to require the mainly commercial policyholders to include it in their risk-management planning."

Eric Galbraith started in the broking business in 1965. He agrees that it is understanding risk that makes the broker's job so important and this is not limited to just climate change.

"Brokers have to be very much up-to-date on the aspects of the changing environment we live in. Be it climate change or medical advances or anything else, they have to maintain an understanding of what's going on and what might affect their clients," he says. "Brokers have a huge job just to deal with the issues around identifying risks then measuring and managing them on behalf of clients. It's about awareness."

Committed to raising its own awareness regarding climate change, BIBA has joined ClimateWise, a group of leading companies and organisations in the insurance industry that has agreed to reduce the risk of climate change by using all of their core business activities and reporting publicly on what they can achieve so that others can learn from their efforts.

Motivation

For Galbraith, BIBA's involvement with ClimateWise is about communicating the information to its members: "We're going to learn more about this issue and then identify what may be useful for our members. Some of our larger members will be very much involved in what's going on, be it the windstorms, what might have an impact on the reinsurance market and what changes might be happening in a variety of areas. How will it affect us? The availability of water, of food and others: we need to understand the impact of these on the clients."

Once the broker has done the job of incorporating these changes into assessing the risk, however, do they not have the responsibility to lay down the law about being covered adequately? Will we ever see a move towards mandated climate change coverage?

"I just don't believe that, especially in western countries where the view is that the hand of regulation should be light," Dlugolecki says. "I know the credit crunch has shown how dramatically wrong that can be but I think we're talking a different level of risk here. How do you decide what is a climate risk? How would you decide if that has been fulfilled or not? It's more important that the advice given be good."

A considerable amount of that advice is based around the science of catastrophe modeling and it will continue to be a key tool in assessing climate change risk and its consequences.

"For a sector of our members, it will be an important area and it will mature as we move forward," Galbraith says. Yet refining it is difficult, he adds: "You just have to look at what's been going on in the last few years with regard to things such as windstorms and changes to the climate in the UK. Identifying what might happen is a very difficult science."

Dlugolecki agrees that, despite difficulties, refining the climate change catastrophe models will continue to be crucial. The technique is not without its limitations, however.

"We should be aware that catastrophe modeling only exists in a few places," Dlugolecki explains. "Show me the catastrophe map for Nigeria, for example. It doesn't exist. So, applying it to more countries would be good and for that you'd need better data. You need to know the past to look forward to the future and there are many countries where the data is not available or it is very expensive."

However, there is still controversy around climate change and just how much of an impact that it is having on the planet; as long as there is any doubt, there will be committed sceptics.

"The USA has always been tough (to persuade), as has southern Europe - Italy, for example," Dlugolecki comments. "It's possible because they are not exposed to the catastrophic storms. They're very sheltered in the Mediterranean. Drought is the big one for them, which should be proving climate change is a risk, though." He also adds that it is often an organisation's most senior staff members that are the biggest naysayers.

Galbraith points out the importance of some caution for the broking profession: "I think it's the role of an insurance broker to be sceptical. We have to challenge issues to identify if something is relevant, if the client will be interested in it and if it will be material to what they're doing."

Revealing

As for the future of broking and climate change, Dlugolecki believes that it will be important to examine markets conditions that are emerging as a result of climate change's more immediate impacts. He argues: "There's an underestimation of the threat to profits resulting from abnormal seasons. People tend to think of climate change as a disastrous end, though it's very interesting how abnormal weather has dented their profits."

Dlugolecki gives two examples of under-examined insurable risk. Firstly, Air Berlin taking a dive in profits when warmer weather led to a drop in people traveling and secondly, the re-invention of Wacoal, a Japanese company that happens to be biggest manufacturer of intimate apparel in the world.

"It took a huge hit from recent warm summers because, basically, people weren't wearing the same amount of underwear," Dlugolecki remarks. "Its profits collapsed, down 70%."

Wacoal is fighting back by redesigning its product to include air-venting and anti-moisture wicking in its products. Dlugolecki's point, however, is that there is more to climate change than the news-grabbing, apocalyptic scenarios.

Galbraith advises some balance, however, about how we talk about the threat of climate change, especially in the face of the current economic conditions: "Due to the current economic downturn (it's important that) we don't focus too much on climate change and put people off taking action. We need to deal with this in a very practical way. People will look at all the current financial market issues and will look at how they can deal with cost, savings and inflation in addition to longer-term issues. Some of these might have to be put to one side because of the current problems.

"It's important we put it forward carefully and not put people off the issue of climate change."