December 6, 2009 18:05
What is it about Denmark? Several hundred years ago a Danish prince couldn't make up his mind about a certain King Claudius and there was hell to pay. Tomorrow, the leaders of the world (or their representatives) will gather in Copenhagen, and, if everything I read is correct, won't be able to make up their collective minds and there will be hell to pay.
Humankind has set loose on the world's stage a specter, Climate Change, impossible to grasp, subject to many disagreements, and of violent character. To tame it, an army of diplomats gathered and played out Scene I, where the Kyoto Protocol was conceived, delivered, and is now nearing its final rest. Now the curtain rises on Scene II in Copenhagen, where all await bold and decisive action. Or even any action.
Let's look at one sector of the world's economy: insurance. In the run-up to Copenhagen, Allianz and the World Wide Fund for Nature teamed to produce a report that identifies four tipping points, where rapid change can be expected with just a small additional change in global average temperatures. See Allianz SE, World Wide Fund for Nature, Major Tipping Points in the Earth's Climate System and Consequences for the Insurance Sector (November 2009). Those tipping point scenarios are: 1. rising sea levels and accompanying flooding, with a heightened increase in the Northeast United States; 2. droughts as the Indian monsoons falter, 3. die-back of the Amazon rainforest, and 4. a shift to a very arid Southwest North America.
The Tipping Point report identifies the impacts each of these scenarios will have on insurance. For example, for rising sea levels "[t]he critical issue is the impact that a hurricane in the New York region would have. Potentially the cost could be 1 trillion dollars at present, rising to over 5 trillion dollars by mid-century. Although much of this would be uninsured, insurers are heavily exposed through hurricane insurance, flood insurance of commercial property, and as investors in real estate and public sector securities." There are several important points in these three sentences. First, the size of the risk: trillions of dollars. Second, the insurance sector has a substantial exposure. Third, much of the loss would be uninsured, meaning that the non-insurance sector (everybody else?) would bear the bulk of the loss.
We blogged last month about the amount of money washing around in insurance company coffers - $4 trillion in premium and nearly $20 trillion under management. Climate change threatens all of that. If hurricanes and floods drive loss ratios up, insurance companies will falter. If real estate investments and public infrastructure are literally under water, the financial debacle will make the demise of Bear Stearns and Lehman Brothers (mere tens of billions of dollars) seem quaint. Accordingly, insurance companies (and other businesses) are looking for action at Copenhagen so they can start planning where to put their assets and make their business plans.
That is why we need action at Copenhagen. Business and industry need to plan; they can't do that if our leaders do not lead. To paraphrase that Danish prince, "to lead, or not to lead, that is not the question."