Climate Change – Assessing its Future Liabilities

There are many challenges facing the insurance/reinsurance industry, and events of the caliber of the World Insurance Forum are tremendously beneficial for fostering the dialogue that is so necessary for us to overcome obstacles successfully. RenaissanceRe Holdings Ltd. is therefore proud to be a Platinum sponsor of the World Insurance Forum, and to participate in its inaugural visit to Dubai.

One of the key challenges we face is understanding enough about the earth’s climate system to make informed business decisions. At the very foundation of this issue is the science of climate change. Climate change is real and is impacted by global warming, as we shall briefly discuss, and this raises much uncertainty for our industry. We will no longer be able to draw upon historical data in our climate modeling, by definition, but must now change our mindset to be forward-looking. There are some lessons that our industry has learned from the past that we can apply to this issue to avoid unpleasant surprises. There will be important opportunities emerging along with the challenges. RenaissanceRe has taken a proactive course to begin modeling the risk and uncertainty associated with climate change. Our leadership in this area will benefit and inform the necessary adaptation and mitigation strategies that must be embraced in the future.

That the Earth’s climate is changing is now widely accepted. Although climate forecasts remain to some degree uncertain, analyses of the available historical climate record provide ample evidence that the earth is warming. The two most reputable temperature analyses both display a definite and significant warming trend. Along with direct measurements of surface temperature, there are many other indications that support the general direction and magnitude of the changing planetary environment. In addition, the prominent role of human contribution to this warming is now on a very firm scientific footing. A broad consensus among scientific and governmental institutions worldwide* has now been established about the following facts:

• The level of several greenhouse gases, including carbon dioxide, methane and nitrous oxide, now far exceeds those that existed at any point in the previous several thousand years.
• Concentration of these greenhouse gases has increased markedly as a result of human activities since 1750.
• Most of the warming over the last fifty years is due to the measured increases in these same greenhouse gases.

These facts portend enormous potential litigious exposure. As liability claims linked to climate change emerge, more and more responsibility will be attributed to corporate entities in relation to their emissions. While this poses a time-critical challenge for our industry as far as providing coverage with adequate terms, at adequate prices, it also presents great opportunity.

There is an analogue to the challenges imposed by climate change that the insurance industry can use as a guide - the impact that asbestos claims have had on the (re)insurance industry. Asbestos exposure had been underwritten for years with little appreciation of the enormous liabilities that were eventually realized. This caught our industry by surprise in the late 80s, and a proactive dialogue between the medical community and the industry began too late. The consequences are still unfolding. The opportunity for us, in managing the ramifications of climate change, lies in our experience of how this problem can telescope to aggravate loss expectation. The good news is that the industry is more adept at applying the science around the issue, and can integrate complex simulation models into the risk decision process. Combining our past experience with a more sophisticated toolbox will enable the industry to lead insureds to solutions, rather than finding itself reacting to unanticipated losses.

The task of developing reliable forecasts for the evolving global climate is formidable. As the historical data upon which the assessment of atmospheric-related risk has been based is no longer viable, we now require computer simulations of both the natural earth climate system and socio-economic feedbacks with that natural climate. Climate forecast models must include interdisciplinary interactions between physics, ecology, and geochemistry for the oceans, atmosphere, cryosphere and land. Yet another layer of complexity arises when one realizes that shifts in weather patterns and sea level rise – not rising global temperatures – are the main threats associated with climate change. There are significant questions around a host of weather-related perils – each crucial to the (re)insurance industry – which need to be answered. What can we expect with regard to hurricane intensity and frequency? How will shifting precipitation patterns impact agriculture and drought/flooding events? Can we expect meaningful changes in winter storm activity? What regions are at increased (or decreased) risk of heat-waves?

While climate forecasts that can be considered truly reliable are probably years away, insurers can play an important role today in facilitating the collaborations with and amongst the scientific community necessary to estimate and narrow these uncertainties. Our industry will be led by those companies that develop sufficient internal expertise to evaluate the latest climate research, and interpret its business impacts. RenaissanceRe is well-positioned in this regard by its breadth; the organization is made up of scientists and wind-engineers, as well as actuaries, underwriters, and economists, all working together. We have been committed since inception to build and maintain the human resources and the infrastructure to support decisions about risk, and we shall continue this strategy to address the risks associated with climate change.

A plethora of new insurance products must be designed, and investment strategies formulated, to support short-term adaptation strategies, longer-term mitigation programs and the uncertain liabilities that might emerge, particularly as we gear towards adapting to climate uncertainty. In the light of the heightened risk of increased storm and hurricane activity linked to climate change, RenaissanceRe has devoted significant resources and effort on loss mitigation research and the development of innovative loss mitigation technologies, specifically property structural loss, due to hurricanes and other atmospheric events. Success in the ‘green economy’ will come to those institutions that are best able to understand the ramifications of climate projections and quantify the uncertainties in these projections. Novel business initiatives will emerge.

As we make new decisions, however, we must be mindful of their impact, both intended and unintended, on the environment. For example, a particular carbon reduction strategy adopted as part of a tradable carbon credit system might be offset (or worse) by unintended ecological and/or geochemical interactions that would have a net negative effect on the climate and/or biosphere. The scientific evaluation of potential consequences, and the management of the new risks they present, will be an important business consideration going forward. The development of new areas of expertise will be required. The global economy will seek both traditional and innovative climate change insurance-based mechanisms, and we as a community are best positioned to create these risk management tools.

Many elements of climate science are still subject to healthy debate, and we as an industry must separate signal from noise, fact from hyperbole, and make clear-eyed assessments of the most probable outcomes and the degree of uncertainty about those outcomes. We must also apply the lessons of the past, even if the data of the past may no longer be relevant. At RenaissanceRe, a core part of our philosophy is to embrace uncertainty rather than avoid it, to make the most educated guesses we can, and then actively develop the knowledge and tools necessary to refine those guesses. We believe this approach will be particularly fruitful with regards to climate change and its impacts.

* NASA Goddard Institute of Space Studies (GISS), National Oceanic and Atmospheric Administration (NOAA), Intergovernmental Panel on Climate Change (IPCC), National Academy of Sciences (NAS), State of the Canadian Cryosphere (SOCC), Environmental Protection Agency (EPA), The Royal Society of the UK (RS), American Geophysical Union (AGU), American Meteorological Society (AMS), American Institute of Physics (AIP), National Center for Atmospheric Research (NCAR), American Meteorological Society (AMS), Canadian Meteorological and Oceanographic Society (CMOS), Academia Brasiliera de Ciencias (Brazil), Royal Society of Canada, Chinese Academy of Sciences, Academie des Sciences (France), Deutsche Akademie der Naturforscher Leopoldina (Germany), Indian National Science Academy, Accademia dei Lincei (Italy), Science Council of Japan, Russian Academy of Sciences, Australian Academy of Sciences, Royal Flemish Academy of Belgium for Sciences and the Arts, Caribbean Academy of Sciences, Indonesian Academy of Sciences, Royal Irish Academy, Academy of Sciences Malaysia, Academy Council of the Royal Society of New Zealand, and the Royal Swedish Academy of Sciences.