Global Warming--To a $225 Billion Opportunity

Carbon-trading markets offer a big new opportunity for the financial services sector but rising oceans could also mean billions of dollars in insured losses.

Whether you agree with Al Gore or not, there are risks and rewards aplenty connected to climate change, according to a new report.

New carbon markets should provide big growth opportunities to the financial services sector in particular, according to a report by the New York-based Oliver Wyman Group. Just how big? The firm puts the potential windfall at $225 billion in new investment by the year 2016.

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But the same opportunities that stand to enrich certain segments of the financial services industry might also result in huge losses for insurers, the report states. Oliver Wyman analysts estimate that the insurance industry, for example, could be facing losses of $150 billion annually by the year 2030 as global warming leads to coastal flooding and other environmental changes.

In addition, those same government regulations designed to reduce carbon dioxide emissions and that will create more revenues for companies that develop or sell cleaning and scrubbing technologies will also mean as much as an estimated $530 billion in expenses by 2030 for companies that have to clean up their act.

Those are all big numbers, and the insurance loss numbers in particular are intimidating, but the Oliver Wyman analysts aren't just yelling "fire" and running out of the room. They list a series of recommendations for insurance executives who want to keep their companies afloat as the waters rise: and who doesn't want to do that?

One strategy to follow, whether your client leads you that way or not, is to reassess the client's operations and real estate holdings.

That means, in the case of a manufacturing client, for example, monitoring the oncoming tide of federal and state regulation to see which aspects of your client's operations that could impact. Or it could mean taking another look at their manufacturing locations to see which ones are located in coastal areas that could be underwater in 20 years if Al Gore's "inconvenient truths" bear him out.

Insurers and other financial services companies can also implement internal controls that are linked to climate change awareness, according to the report. That means creating in-company communications channels so that climate risk and climate-related opportunities are reported on through all management levels and used to direct strategies and products.

The report also urges insurers to work collaboratively with government and other industry segments to use the capital markets in a way that best takes advantages of the changes in climate that are occurring.

Whether climatic changes are occurring due to natural changes in the temperature of planet Earth or whether they are occurring because of more industrial activity is really beside the point. As far as the Oliver Wyman analysts are concerned, they accept the scientific consensus view on the issue. Al Gore would be pleased.

April 1, 2008

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