Sunday, 12 May 2013

Insurance and climate change

It was reported on Friday that the concentration of CO2 in our atmosphere recorded at the Mauna Loa laboratory in Hawaii now exceeds 400ppm - for the first time in the history of mankind, the first time for at least 3 million years [1]. I find this news alarming, though not surprising. I don't often agree with Prince Charles about anything but I am with him when he says that we can't wait for absolute certainty before acting to fix our climate [2]. Although scientists can never be 100% sure that any particular weather event is due to climate change we do seem to be getting rather more of them recently and some industries are affected more than others, the insurance industry for one: John Coomber, on the board of Swiss Re and current chairman of ClimateWise, an association of insurance companies, says: 'Swiss Re’s estimates show that since the early seventies global insured losses specifically attributable to climate-related disasters have jumped from an annual $5 billion to approximately $ 60 billion in 2011'. ClimateWise members are worried and they aim to get something done about it [3].

One of ClimateWise principles (number 2.4) is to 'Support government action, including regulation that will enhance the resilience and reduce the environmental impact of infrastructure and communities.' As part of this they ran a workshop in San Diego in March this year on Building Resilient Cities. Mark Way, also from Swiss Re, explained why this issue is critical [4]:
  1. More and more of our valuable assets are concentrated in urban areas.
  2. The hazards of extreme weather are increasing due to climate change.
  3. Unless we take action to mitigate against climate change and build resilience to extreme weather, these events will become too expensive to insure commercially - governments may step in to fill the gap but still someone has to pay.
  4. Hurricane Sandy caused $500 billion in losses but only half of this was insured - uninsured losses are a drain on the economy.
  5. City infrastructure is getting more complicated and interdependent, so failures cascade. Hurricane Sandy interrupted power to 8 million people for days and weeks in some cases and it caused costly disruption to transport, both on the road and in the air.

The ClimateWise principles also include supporting public policy for reducing carbon emissions. However,  the rollout of critical low carbon technologies is delayed due in part to unaffordable insurance.

The UK nuclear power program is in tatters. The aim is for 5 new power stations providing 16 GW power by 2025  but two consortia have pulled out leaving only EDF/Centrica, who haven't quite decided yet [5]. The problem is rising costs and there are lots of reasons for this but insurance is surely one of them The UK is subject to the Brussels convention which determines liability to 3rd parties following an incident. Prior to recent changes operators were required to insure for a liability of £140 million. Now it is €1.2 billion - 7 times as much. Also claims can be made for a wider range of damages including environmental harm and cross border (even outside the EU) claims [6].

Carbon capture and storage is a new technology which needs insurance and ClimateWise has a special report on this [7]. The first issue they cite is that under the current rules operators have liability in case of CO2 leakage to pay for allowances under the European Emissions Trading Scheme. Since the price of the allowances floats according to the market, this liability is potentially unlimited and therefore uninsurable. Another problem is the need to provide financial security for decommissioning costs - these need to be provided up front before a licence is issued.

In summary on the one hand if we don't take action to mitigate against climate change it may become impossible to insure ourselves against extreme climate events. On the other hand, some of the UK government's favourite low carbon energy technologies may be too expensive to insure -  perhaps we will have to rely more on energy efficiency instead.

[1] Carbon dioxide passes symbolic mark BBC 10th May
[2] Prince Charles attacks global warming sceptics. Guardian 9th May
[3] ClimateWise principles: the 5th independent review 2012
[4] ClimateWise collaroration: City Resilience March 2013
[5] Doubts mount over UK's nuclear future Telegraph May 2013
[6] Long Term Nuclear Energy Strategy (UK Government, 2013).
[7] Managing Liabilites of European Carbon Capture and Storage ClimateWise (2013)

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