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RT HON STEPHEN BYERS MP TO CLIMATE CHANGE 2007 CONFERENCE, 12 MARCH 2007

Introduction

Climate change represents one of the most serious and far reaching challenges we face.

The costs of failing to mobilise in the face of this threat will be high. The economic cost will be punitive. The social and human costs will be unacceptable.

That is why tackling climate change is at the top of the political agenda. But there needs to be more that just a government led approach. Individuals have a responsibility. There will be significant and far reaching implications for the insurance industry. There will be challenges but for those who move quickly there will be opportunities,

Today is not the time for an overtly party political speech. What I would like to do is set out and provide the context for the key events that will be taking place; to consider the impact of the report from Sir Nicholas Stern on the economics of climate change. Then to look specifically at the implications for the insurance industry – in particular to consider how it might respond to the changing circumstances, not just in terms of limiting potential liabilities and the threat of risk to reputation but in a more positive way to identify those new commercial opportunities which always occur when the established order changes and the world is in a state of flux.

Let’s begin with some of the key dates in the climate change diary.

8/9 March European Union Heads of State Summit, Germany

13/14 March World Bank, World Economic Forum meeting, London

21 March UK Budget Statement

6 April UN Intergovernmental Panel on Climate Change report on the impact of climate change

4 May UN IPCC report on mitigating the impact of climate change

By end of May? Publication of Climate Change Bill

5/7 June G8+5 (India, China, Brazil, Mexico and South Africa) Summit, Germany

3/14 December UN Climate Change conference, Indonesia

July 2008 G8+5 Summit, Japan

November 2008 US Presidential Election

January 2009 New US President takes office

2012 Replacement for Kyoto Protocol to be in place

The discussions that take place at these events will be informed not just by the scientific analysis, the social costs of inaction but also a result of the Stern Review the economic consequences of climate change.

Stern Review

There is now a broad consensus about the science of climate change – that global warming is taking place leading to severe weather conditions and that this is due to human activity.

The Stern Review was commissioned to investigate the economic impact of climate change. It reported at the end of last year and described global warming as the ‘greatest market failure the world has ever seen’.

It concludes that climate change will severely affect the global economy, human life and the environment. That although no country will be spared the impact it will be the poorest developing countries that are most vulnerable and will suffer earliest and to a greater extent.

The Report argues that concentrations of greenhouse gases in the atmosphere are already at around 430 parts per million and that global efforts should concentrate on limiting the level to between 450-550 parts per million. Stern says that this is achievable, economically feasible and will significantly reduce the risks of climate change. The costs of taking the necessary action to limit greenhouse gases to this level would be around 1% of global GDP every year but a failure to act would cost at least 5% of global GDP a year.

He also stresses that early action to tackle climate change will be much more cost effective than dramatic action taken at a later date.

Of particular interest to the insurance sector are the increased costs of rising temperature levels.

The Report concludes that the costs of damage from extreme weather (storms, hurricanes, typhoons, floods, droughts and heat waves) will increase rapidly as the temperature increases. By the middle of this century the costs of extreme weather could reach between a half and one percent of world GDP per annum.

A 5-10% increase in hurricane wind speed as a result of rising sea temperatures is predicted to double annual damage costs in the United States. Incidentally, the latest calculation is that Hurricane Katrina caused costs to the insurance industry of around 45 billion dollars.

In the United Kingdom annual flood losses are likely to at least double and could even quadruple.

Heat waves like that experienced in 2003 in Europe when 35.000 people died and agricultural losses reached 15 billion dollars will be commonplace by 2050.

Against this backdrop Sir Nicholas made four key policy recommendations:

First, to put a price on carbon. Only by doing this will the costs of climate change be factored into all economic decisions. At present those who produce greenhouse gas emissions are causing climate change. This imposes costs on the world and will be a burden on future generations but those responsible do not bear the full cost of their actions themselves. Putting a price on carbon – through tax, trading or by regulation will mean that those responsible will be faced with the financial costs of their actions.

The second essential element in the transition to a low carbon economy is to have an accelerated technology policy. For Stern this has to cover the full spectrum from research and development to demonstration and early stage deployment.

Thirdly, there must be a greater commitment both domestically and internationally to use energy efficiently.

Finally, international action is needed to avoid deforestation. The increase in emissions due to deforestation is very significant. Stern calculates that it represents more than 18% of global emissions – a share greater than that of global transport and nine times greater than greenhouse gas emissions from the United Kingdom which stand at 2%.

Stern calls for United Nations and the World Bank to take urgent action to preserve the remaining areas of natural forest.

As a result of his analysis and conclusions, Stern has had a real impact on the international debate. He has provided a framework within which key decisions will be taken.

It is against this background that the insurance industry will be operating. Being prepared for climate change has to be priority for the industry.

The Insurance Industry and Climate Change

Whether you like it or not insurance is on the front line of climate change. Your industry is all about analysing, evaluating and managing risk. We now have a totally new set of risks that have come about because of climate change.

Insurance companies have the responsibility of dealing with the effects of severe and extreme weather conditions.

Most attention is understandably focussed on claims in respect of commercial and residential property. But the insurance industry’s potential involvement is far greater than this and could extend to your role as investors and shareholders.

As a result of emissions that have already taken place climate change and its consequences will be with us for the foreseeable future. Political debate is very much focussed on how we can stop things getting much worse in the future.

So we must therefore consider how the insurance industry should respond to the potential increase in liabilities that arise from severe weather conditions and to the greater public awareness and concerns about climate change.

The ABI has identified four main ways in which climate change will have a direct impact on the industry.

The first is changing customer needs. Insurance allows risk to be transferred. It allows individuals and business to manage their potential liabilities. This will become increasingly important as climate change leads to greater risks.

As new businesses emerge in response to climate change they will require insurance. New liabilities might be created as a result of severe weather and these will require cover.

Secondly, climate change will lead to a new pattern of claims. We have already seen a significant increase in claims for flood and storm damage. This winter has seen the loss of electricity due to heavy snow leading to a high number of claims for business interruption.

Thirdly, this is an area which is likely to see market mechanisms being used in an effort to reduce emissions. We already have in place the European Union Emissions Trading Scheme. This will have an impact on investment returns from particular sectors. Minimum construction standards and regulations to enforce energy efficiency measure all need to be taken into account.

Finally, this whole area has the potential to put a well established reputation at risk.

Whole communities can be affected by severe weather conditions. People will be in a state of shock and upset. In these circumstances it is crucial for insurance companies to respond sympathetically and quickly. The performance of one insurance company will be compared against another. With people often looking to blame something or somebody at times like this then a failure to perform or to communicate effectively can put a hard earned reputation at risk.

The insurance industry as a whole needs to be engaged in the debate about the actions needed to tackle climate change

New Opportunities

Climate change will lead to a whole range of challenges. Things will not be the same. But with change comes new commercial opportunities. The market for the type of product you offer will be different and increasingly customers will want to know your investment policies and what part they play in the effort to tackle climate change.

So what might these new opportunities or policies to gain public support be?

i) offering lower premiums for energy efficient homes
ii) developing new products to support the emerging global carbon market
iii) adoption of investment policies that treat renewables, adaptation and other measures to tackle climate change as a priority
iv) Offering flood resilient reinstatement in high flood risk areas
v) Innovative products tailor-made for clean energy providers and carbon neutral companies.
vi) New liabilities might arise which will require insurance eg directors may have liability for the environmental impact of their decisions and actions of other companies.
vii) Partnership with government to provide insurance cover to those who would otherwise be denied as a result of the scale of risk due to climate change.
viii) Ensuring that Corporate Social Responsibility policies fully incorporate a well thought out approach to climate change.
ix) Becoming a carbon neutral insurance company and promoting the fact.

The Future

Four broad scenarios for the future:

STRICTLY BALLROOM
This sees concerted international action. With a strong and effective regime ready to be put in place when the period of the Kyoto Protocol comes to an end in 2012.

Certainty achieved about the development of a global carbon market. Governments and international financial institutions (World Bank) promote investment in new technologies, energy efficiency, mitigation and adaptation.

Business able to plan ahead within a framework where there is a degree of predictability.

DIRTY DANCING
It all goes wrong. A failure to agree a post Kyoto international framework which includes cuts in emissions form major polluters like the United States, China and India.

Lack of political will to drive the development of a global carbon market.

International disagreement about the need for action leads to uncertainty in the investment community.

SLEEPLESS IN SEATTLE
Next 18 months sees the world focus on the US Presidential election. Leads to a lack of focus and discussions being delayed. Puts at risk the timetable for securing a comprehensive framework ready for implementation post Kyoto in 2012.

HOKEY-COKEY
G8+5 in Germany and Japan fails to agree on the next steps forward but important and significant actions continue to be taken. The European Union Emissions Trading Scheme is toughened up and widened. Some key States in America act unilaterally without the support of the White House. Look for programmes being adopted in California and the grouping of States in the North-East. China is looking at the implications of a carbon market.

More companies and cities take steps to become carbon neutral.

World Bank puts in place and implements investment framework to help developing countries mitigate and adapt to climate change

Conclusion

The insurance industry’s response to climate change will ultimately be business led. There will be challenges. Change that comes about from climate change will need to be managed wherever it is possible to do so. But there will be new commercial opportunities for those with the vision and motivation to identify them.

For the insurance industry it is the opportunity to be at the centre of a crucial debate, meeting the needs of society whilst growing a profitable sector of the economy.