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GIRO 2007 - Climate Change and Strategy

Some General Insurance Actuaries may hold to one or all of the following views:

• The ultimate impact of climate change on general insurance companies will be much less than the current scientific consensus - as outlined in the The IPCC Working Group I Report The Physical Science Basis published in April 2007 - predicts.

• Even if these impacts do occur they are many years off and General Insurance actuaries managing one year business (unlike life, pensions or investment actuaries) have many years to take the required action

However, the threat and perception of Climate Change is having an environmental impact today in two distinct senses.

1) The IPCC Working Group II Report Impacts, Adaptation and Vulnerability published in April 2007 identified a number of areas where there is high or very confidence (meaning about an 8 in 10 chance or 9 in 10 chance respectively of being correct) that natural systems are already being affected.

2) Equally importantly - there is a strong impact on the external macro-environment within with General Insurance Companies operate. General Insurance companies need to factor this into their strategy NOW.

John Browne famously moving BP away from its contrarian viewpoint to a "Beyond Petroleum" strategy in 1996-7 said in a widely reported speech in 1997 following the IPCC's 2nd assessment report in 1996.

"There's a lot of noise in the data. It is hard to isolate cause and effect. But there is now an effective consensus among the world's leading scientists and serious and well-informed people outside the scientific community that there is a discernible human influence on the climate and a link between the concentration of carbon dioxide and the increase in temperature. The prediction of the IPCC is that over the next century temperatures might rise by a further 1 to 3.5 degrees centigrade, and that sea levels might rise by between 15 and 95 centimeters. Those are wide margins of error, but it would be unwise and potentially dangerous to ignore the mounting concern. The time to consider the policy dimensions of climate change is not when the link between greenhouse gases and climate change is conclusively proven, but when the possibility cannot be discounted and is taken seriously by the society of which we are part."

A common tool for strategy evaluation is the: PEST/PESTL/STEEPLE/STEEPLED model.

See this GIRO paper and this WIKI link.

which involves setting a companies strategy in the context of the:

Socio-cultural, Technological, Economic, Environmental, Political, Legal, Ethics, Demographic situation.

Considering each area in turn (putting aside "Environmental" which is addressed under 1) we can see that impacts are already occurring each of them:

• Socio-cultural: The socio-cultural importance of climate change is close to or already beyond a Tipping Point as popularised by Malcolm Gladwell. Tipping points have three essential factors, he says. One, lots of little behaviours accumulate and begin to push a system toward change. Two, some ideas or issues “infect” public awareness and spread like a virus, pulling the system toward even greater change. Finally, one significant moment occurs when things “tip.”. The increasing prevalence of climate change as a socio-cultural issue or can be seen in a wide range of areas - from advertising (with companies keen to promote themsleves and their products as climate change aware/friendly) to magazine front pages to the recent Oscars to the Live Earth concert.

• Technological: One of two key responses to climate change is Mitigation. This was covered in detail in The IPCC Working Group III Report Mitigation of Climate Change. Mitigation (in this context) involves attempts to slow or reverse the process of global climate change - normally by lowering the level of greenhouse gases in the atmosphere. There have been a number of proposals for mitigation. Of these the most famous is the concept of Seven Mitigation Wedges. Many companies are already very actively investing in developments of areas such as: geo-thermal energy, wind-farms, solar energy, hydro energy, carbon sequestration, hybrid vehicles, biomass - all of which require insurance solutions.

• Economic: Carbon Trading is already underway and various Carbon Taxes are under active consideration

• Political: We are already past a Tipping Point in this area. In the UK Cameron and Brown/Milliband fighting to see if Blue or Red will be the new green. The upcoming Australian election is likely to be the first Western national election where climate change is the key campaign issue. In the US Arnold Schwarzenegger is the most high profile of a number of governors making climate change a state issue, and post the next Presidential elections it will inevitably become a bigger federal issue.

• Legal: The UK Government has proposed a new Climate Change Bill. The State of California has launched a high profile lawsuit against car manufacturers while a class action was laucnhed in 2006 by Mississippi homeowners against oil, gas and energy companies claiming they contributed to Hurricane Katrina.

• Ethics: Increasingly we are getting close to a Tipping Point here, with a backlash starting against 4x4s and frequent flying, increasing popularity of Local Farmer's Markets and with companies increasingly trying to advertise their green credentials.

• Demographic: The other key response to climate change is Adaptation. Adaptation (in this context) involves development of ways to reduce vulnerability (particularly human vulnerability) to the impact of climate change. One key part of this may well be demographic, with a reversal of the current population moves to the coast. The implications of climate change and raised sea levels on the huge planned development of the Thames floodplain is currently being debated - with the insurance industry a key participant in that debate. In addition there is a growing awareness that Climate Change will lead to an unprecented rise in migration and displacement.

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