Insurers in the eye of the storm

With Gustav down and Hanna, Ivan and Josephine still to go, the 2008 hurricane season threatens another year of big catastrophe payouts.

Post-Gustav claims could reach $10 billion - but with US officials predicting a further 14-18 tropical storms this season, versus the historical average of 10, the insurance bill may yet top the $30 billion paid out last year.

Alexis Krajeski, Associate Director of Governance & Sustainable Investment at F&C, said: "The latest research indicates the past decade has been the hottest in the northern hemisphere in at least 1,300 years, and these extreme global weather events bear this out. This week's devastation in the US and Caribbean is a reminder of how vital it is for insurance companies to protect themselves against the rising cost of claims".

Krajeski says insurers have been slow off the mark and urgently need to develop climate change strategies. "A stable and efficient insurance sector provides vital underpinning to society and the economy by allowing consumers and businesses to pool risks, and thereby make investments they could not otherwise afford. But the system is under threat: the real cost of insurance cover is not necessarily reflected in the premiums insurers have been charging, because climate change means the past is no longer a reliable guide to the future".

"Some insurers have responded in the US, for example by reducing premiums for customers who install flood defences on their homes, but several major US insurers have simply withdrawn from high-risk areas, leaving the state to step in. By contrast, in the UK, the industry has successfully engaged the government to shore up flood defences and allow flexibility in pricing to reflect underlying risk."

Last autumn, F&C issued a report - ‘In the Front Line: The insurance industry's response to climate change' - which coincided with 38 companies pledging to take action on climate change through the ClimateWise principles. "The past year has seen some improvements, particularly with some larger European and US players developing climate risk strategies" says Krajeski. "But, globally the industry has yet to respond sufficiently."

Krajeski concludes: "Insurers are in real danger of becoming the victims of climate change. They need to act now and play a key role in shaping regulatory policy, so that the industry as a whole can adapt to the challenge posed by climate change and continue to fulfil its core function of enabling customers to protect their assets at the right price."