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Carriers Take Cautious Climate Change Approach

Bill Kenealy April 1, 2008

It has been said that the only constant is change, and that certainly is the case with earth’s climate. The rancorous debate about whether human activity is abetting this change is largely immaterial to an insurer, which, as an assessor of risk, needs to account for the vagaries of climate such as floods, wild fires and hurricanes, regardless of the underlying cause.

While the political heat around the issue in the United States may mean that American insurers are less likely to trumpet their efforts to account for a changing climate, little such hesitance exists in Europe, where insurers such as Zurich Financial Services Group, Munich Re Group and Allianz Group have well-publicized climate change initiatives underway. “Munich Re and its experts have been drawing attention to man-made climate change and its effects since 1973,” says Torsten Jeworrek, a member of the company’s board. “In the long term, global warming will lead to a further increase in weather-related catastrophes, the financial impact of which will have to be borne by insurers and the public.”

This concern over climate change also is evident among underwriters. In its fourth annual underwriting survey, published in February, Lloyd’s of London found that 57% of underwriters believe more needs to be done to prepare for the impact of climate change.

THE BROAD APPROACH

Lindene Patton, senior VP and counsel for Zurich North America, says the company seeks to deal with climate change in a comprehensive manner, and is entrenching the tools and mechanisms needed to address climate change throughout Zurich’s operations. The most obvious manifestation of this is the Internal Climate Office, which Zurich established and housed within the office of its global chief underwriter. “The concept is to make issues associated with climate change fully embedded in our underwriting infrastructure so people are clear that we have a market-oriented approach,” Patton says. “Our intention is to make this part of our business rather than deal with it as a separate activity.”

In order to address issues such as tropical storms arising out climate change, one tool Zurich employs across the enterprise is monitoring. “In the natural catastrophe area, we have historically used sophisticated monitoring techniques to model all of our exposures,” Patton says, adding the company uses the technology not just for underwriting, but also for claims management.

For example, monitoring enables the company to precisely and safely preposition resources (everything from adjusters to generators) once the track of a storm has been determined. “We’re using this technology not just to improve pricing, but also performance.”

In addition to new monitoring techniques, the other primary area where Zurich employs technology is in catastrophe modeling. Like most in the industry, the company uses models compiled with the help of outside risk modeling firms.

“We take those models and augment them with our proprietary information,” Patton says. “Our expectations are that as we, and scientists, learn more about climate change, these models will get more sophisticated.”

TERRA INCOGNITA

The onus of improving catastrophe models falls largely on the shoulders of people such as Dr. Peter Dailey, director of atmospheric science for Boston-based AIR Worldwide Corp., which develops risk models for insurance companies. Dailey says AIR develops its catastrophe models based largely on historical data. What vexes him and other climatologists is that climate change is an unknown, and there are no records to refer back to when compiling new models. “Our models really depend on the historical record in order to formulate the model and understand the risk,” he says. “Without the data, it’s virtually impossible to start on the problem.”

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