Premiums will have to rise and some risks might even be classed as uninsurable due to greenhouse gases and rising sea levels, warned Lloyd's in a report entitled Climate Change, Adapt or Bust.
"Although it's almost two decades since the UN recognised that climate change was a catastrophic threat to the Earth, it's clear that the insurance industry has not taken catastrophe trends seriously enough. Climate change is today's problem not tomorrow's. If we don't take action now to understand the changing nature of our planet we will face extinction," said Lloyd's director, Rolf Tolle.
Recent natural disasters revealed the inadequacy of capital and pricing methods and there was a need for catastrophe estimates to be constantly updated in line with scientific evidence, he said. Insurers should cease to base risk premiums on historical data and do more to look ahead and factor in scenarios connected with climate change, says the report.
Lloyd's, which has the capacity to write £15bn worth of business this year, did not want to enter the politicially contentious debate on how much human activity affected global warming but was happy to accept the "growing body of opinion" on the issue. The rising cost of weather-related catastrophes made it impossible for the insurance market to ignore what was happening with rising carbon dioxide levels, it said.
In the short term the insurance industry would have to invest more time and money in academic research as well as convert scientific predictions into practical guidance for the sector.
The report says: "In the long term, strategists will want to consider the future insurability of weather-related risk. Based on long experience, Lloyd's believes the vast majority of natural perils are currently insurable. However, we recognise that some industry participants take an alternative view."
Lloyd's noted that high sea temperatures are a key ingredient in wind storms, and that over the past century overall sea water temperature had risen by between 0.2C and 0.6C. Increased hurricanes, such as Katrina, which devastated New Orleans last year, should not have been a surprise since academics had warned in 2001 of this kind of weather pattern. "Recent temperatures are probably outside the range of past oscillations and seem to suggest we will be caught in an upward cycle for some time to come," Lloyd's predicted.
The market also noted the speculation about the polar ice cap melting and warned that a four-metre rise in water levels worldwide would inundate almost every coastal city. Rising sea levels should encourage insurers to consider how much business they wanted to have connected to vulnerable coastal areas. They might consider withdrawing or restricting cover in flood-prone "hotspots", it suggested.
The unstable climate could have an impact on global asset values, reducing their value to insurers which have traditionally relied on investment returns to boost profits, it warned. "Consequently it will become even more important for insurers to price risk according to exposure, and to underwrite for profit, without reliance on investment income."
It was time for insurers to stop treating climate change as a peripheral field of work and to put it at the centre of their operations. "Understanding and responding to it must become 'business as usual' for insurers and those they work with."
