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By LINDENE E. PATTON, chief climate product officer at Zurich Financial Services

To find out if climate change represents a risk or opportunity for insurance, we must ask the right question. To do that, we might consider three key points:

2. Demographic and economic research through 2050 from HSBC projects that world output might treble but suggests that substantial increases in population and concomitant resource and infrastructure demands will occur in parts of the world most vulnerable to climate change.

3. A recent rise in litigation involving natural catastrophes and natural resource damages suggests that society, as a whole, is increasingly unwilling to tolerate the destruction of or damage to natural resources as a result of human activities.

Another thing to consider is that insurance industry research from Munich Re shows a continuing fall in the ratio of insured loss to total loss for such exposures from natural disasters. In other words, society at large appears increasingly underinsured for the impacts of climate change at the time of its greatest need.

This appears to also have led to a series of public-policy actions shaping our industry historically and potentially in the future in ways that may or may not promote use of insurance in the most economically efficient and effective manner.

Signs suggest that society is looking for a solution to this large emerging cost. Yet despite the warnings and predictions of experts, depending upon where you look, it is hard to see any consistent response to the warnings. This, however, should not come as a surprise because the impacts of economic growth and climate change are not now and are not anticipated to be uniform in the future, so to expect consistency is unrealistic.

The fact that we have inconsistent demand signals from our customer bases should be no surprise. If the risks of climate change are inconsistent, then so are the risk profiles and the needs of potential insurance customers.

It follows logically that many types of products will be required to respond--including insurance products. There will be no "one size fits all." In fact, studies of green insurance products show that they come in many shapes and sizes.

WHERE CUSTOMERS COME IN

But do insurance customers really believe in climate change? Will they take actions and buy products accordingly?

A recent study released by Yale University and George Mason University, titled "Climate Change in the American Mind," confirmed that society in the United States as a whole remains very conflicted in its beliefs about climate change. When you begin to segment, though, the uniformity is lost and opportunity begins to emerge.

The focus on "belief" is both critical and appropriate because the real issue that determines if society supports a low-carbon conversion or "greening of the economy" is whether stakeholders believe in the need to change with sufficient certainty to make the commitment to change.

In many economies today, there appears to be a governance gap on the issue of climate change, compounded by a conflict of laws, which discourage action. The fossil-fuel paradigm frames all current economies, so:

-- Consumer protection legislation prohibits incorporation of costs for externalities unless mandated.

-- Current laws do not address many "rights" of interest in a low-carbon economy

-- Judicially made law and administrative action "fill the gaps" where government leadership fails to act, creating inconsistency and unpredictability--volatility.

There is no "safe haven" in "low-carbon economics" unless you identify a consumer or buyer cohort that is willing to pay more for or otherwise differentiate and prioritize buying decisions based upon low-carbon emission and other sustainability characteristics. This is true for all major economic actors, including insurers.

EMERGING INSURANCE OPPORTUNTIES

But in the United States, there are jurisdictions where the governance gap is being filled and where regulatory requirements are emerging--such as adaptation plans and new building codes requiring green construction.

The surveys referenced above suggest that such laws and other market demand are driving the sales of green professional liability and construction insurance products. They also show purchase of green directors' and officers' liability insurance coverages. And they suggest that, if a constituent believes in climate change, he believes that risk of damage presents.

When combined with emerging market and general growth demand that is likely to critically reduce natural resource reserves, risk management solutions and risk spreading will be essential for continued economic prosperity.

After all, how can you grow crops with no water? Perhaps what insurance needs to do is to spread risk in such a way to encourage farmers to switch practices, so they can get by with much less water. Consider repurposed index insurance. In developed markets perhaps we should consider ways to encourage and spread risk related to water reuse, recycling and reinjection by repurposing existing pollution insurance policies.

With respect to encouraging resilience, perhaps we should simply and expressly articulate the credit or "discount" that is already provided as part of base rating for more resilient structures in property coverages. In other words, get credit for what we already do to encourage adaptation and encourage more.

This is clearly a market replete with risk and risk managers looking for solutions. What we in the insurance industry must determine is how we can serve customers with green products and services that have sufficient specificity to be attractive enough to buy.

Author's disclaimer: The information in this publication was compiled from sources believed to be reliable for informational purposes only. Zurich neither endorses nor rejects the recommendations of the discussion presented. All sample policies and procedures herein should serve as a guideline, which you can use to create your own policies and procedures. Any and all information contained herein is not intended to constitute legal advice and accordingly, you should consult with your own attorneys when developing programs and policies. We do not guarantee the accuracy of this information or any results and further assume no liability in connection with this publication and sample policies and procedures, including any information, methods or safety suggestions contained herein.

August 1, 2011

Copyright 2011© LRP Publications