Foreign Influences: Weather or Not?

There hasn't been a hurricane in London since last, oh, ever. But there has been an insurer there, Lloyd's, since 1771. And because it's an outfit that historically insured ships, weather is never too far from its mind. Last year Hurricane Katrina turned heads at Lloyd's. The storm didn't just flood New Orleans; it also swept away the insurance industry's trust in its catastrophe modeling, the tool it depends on to evaluate bad-weather risk. The model assumed that a hurricane like Katrina couldn't happen in the same year as two other superstorms. Nor did it envision the off-the-scale damage caused by Katrina--275,000 houses destroyed, 10 times the number flattened by the previous worst-case model, Hurricane Andrew. Katrina prompted Lloyd's and other insurers to do some corporate soul searching that, surprisingly, could speed up the world's counterattack against global warming.

More than any other sector, insurers need to separate the reality from the myths of global warming. "There is a growing body of expert opinion that our climate is changing. For Lloyd's of London, ignoring that was not an option," says Darragh Grey, senior manager of the 360 Risk Project at the storied high-risk underwriters and author of a new report on the insurance industry's failure to confront climate change.

As our climate continues to warm and catastrophic weather events increase, insurers will suffer or gain on the basis of their environmental-risk projections. If they get it wrong--as when many U.S. insurers were sideswiped by large-scale asbestos-pollution claims--or if they are blindsided by the kinds of terrorist attacks that simultaneously generate claims for lives and business lost and damage to real estate and infrastructure, they could find themselves insolvent.

Issued in May, Grey's report, "Adapt or Bust," delivered a stark message. It read, "So far, the industry has not taken changing catastrophe trends seriously enough. Climate change is likely to bring us all an even more uncertain future. If we do not take action now to understand the risks and their impact, the changing climate could kill us." Its sobering conclusion: "The insurance industry must now seize the opportunity to make a difference, not just to the future of our own industry, but to the future of society."

Insurance has always prided itself on taking a leadership role on societal issues. In the U.S. the insurance industry pushed for the establishment of official fire departments in the 19th century. More recently, the British insurance industry, as part of its campaign to be able to keep offering flood insurance, lobbied hard in the 2005 elections for better flood-defense funding.

In keeping with that history, the Lloyd's warning might be seen as a wholesale call to combat climate change. But few issues in the insurance business are that simple. The fact is, most big insurers like Prudential, Travelers and AIG are heavy investors in businesses that are believed to contribute to global warming. A 2000 report by Friends of the Earth on the investment portfolios of Britain's top insurance companies, for instance, found they invested heavily in such global oil and mining companies as ExxonMobil, Elf Aquitaine and Rio Tinto.