Foreign Influences: Weather or Not?

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The problem is that insurers have historically not managed risk between their investment portfolios and their underwriting portfolios. As a result, they invest in energy companies because the return is good, without considering the risk for their underwriting side. They don't see the need to hedge their position.

For that reason, some close industry watchers doubt whether Lloyd's apocalyptic tone will revise anything. Andrew Dlugolecki, an independent climate-change consultant and a veteran of the insurance industry, says, "It's good that they have spoken out, but I don't see them as serious in changing the insurance industry." That sentiment is echoed by Michael Brune, executive director of Rainforest Action Network, which has successfully lobbied Bank of America, Citibank and major U.S. retailer Home Depot to change their sustainable-development positions. "If you want to be an environmental leader, then you need to switch from relying on dirty old energy and embrace new, renewable strategies."

You might think, from a corporate-coherence perspective, that insurers would coordinate their underwriting and investment strategies. You would be wrong. Traditionally, the underwriting and investment divisions of Big Insurance have been run as autonomous operations. "There's a real disconnect between the investment side and the acknowledgment of climate change," says Matthew Arnold, who tracks the U.S. insurance industry as a director of the consultancy Sustainable Finance.

Some insurers, however, insist that they are going to begin investing in more environmentally friendly energy projects. For the past year, German giant Allianz Capital Partners has been assembling a team dedicated solely to renewable-energy investments and led by David Jones, Shell's former head of wind energy. The company estimates it will have about $600 million invested in renewable-energy infrastructure projects over the next five years--notably in wind-turbine hardware. "We have identified renewable energy as an absolute growth market," says Thomas Pütter, chief executive of Allianz. He points to China's embrace of wind power. The government has wind-mapped the entire country and is committed to building the world's largest wind-power farm, with an eventual output of 200 gigawatts.

Meanwhile, Swiss Re, which has a large U.S. presence after buying GE's reinsurance business, is breaking down the wall between investing and underwriting. By comparing its underwriting and investment portfolios, the company hopes to maximize profits from both sectors and minimize its overall risk.

Profit, of course, is what this is ultimately all about. Savvy insurance companies have realized not only that they need smart catastrophe modeling to minimize risk and help price their underwriting effectively but also that they must understand the middle- and long-term liabilities of their investments. With the growth of carbon-trading markets in Europe and the U.S.--and industry's begrudging acknowledgment that its carbon footprint is likely to be taxed in the future--polluting sectors and companies begin to look like less attractive investments.