Hot extremes of temperature result in heat waves and draught; cold extremes of temperature result in frost; rainfall extremes result in flash flood or draught; and intensified mid-latitude storms and tropical cyclones result in wind storm, snow storms, hailstorm and avalanche, which affects insurance for health, life, property, vehicle, business interruption, agriculture and food stuff.
The insurance industry must face up to the growing threat of climate change or risk financial ruin. Insurers must act now to understand and actively manage risks from emerging threats such as greenhouse gases and rising sea levels. Although it's been almost two decades since the UN recognised that climate change was a catastrophic threat to earth, it is clear that the insurance industry has not taken catastrophe trends seriously enough. With recent scientific evidence suggesting that climate change is happening faster than previously thought, investment in research and a change in industry behaviour are long overdue.
Recent natural disasters have revealed the inadequacy of capital and pricing models, so catastrophe models must be updated regularly to keep pace with the latest scientific evidence. The industry must take a new approach to underwriting, looking ahead and factoring in climate change scenarios, rather than simply basing decisions on historical records. Insurers must prepare for the impact of climate change on asset values and regularly review and communicate conditions of coverage in light of the impact of climate change.
Rating agencies are retooling their models and many are worried what the new views of catastrophe risk from these concerns like global warming menace will mean for the industry.
Fitch Ratings has released a draft of its new Prism rating model and asked insurers, investors, brokers, investment bankers, regulatory bodies and other individuals and organisations to comment by July 10. Fitch hopes to complete the shift to the Prism model in early 2007.
Standard & Poor's has also issued major revisions to its insurer latest capital model, which is not dynamic as Fitch but still recognises the preparedness for scenarios like global warming.
Industry leaders need to get the message to front-line underwriters to maintain pricing discipline, but even that won't prevent inevitable soft markets or a potential competitive pricing 'bloodbath' by very insensitive nature of insurance regulation. Who cares for a ruin reserve on a slow surfacing risk like global warming?
Speaking at the Standard & Poor's Insurance Conference in New York, the chief executives Ed Kelly of Boston-based Liberty Mutual, Martin Sullivan of New York-based American International Group and Dinos Iordanou of Bermuda-based Arch Capital Group admitted in unison, "We don't seem to learn from the mistakes of the past. That's a fact. Some of us are in this business for 36 years, and candidly, we don't like good times forever. The down cycles of soft markets that have emerged are always longer than the up cycles. It's always been lack of capacity that's driven prices upward, dwindling capacity in the property market, particularly in catastrophe-prone regions, is pushing those prices up. We're seeing price changes daily. Even if there's plenty of capacity, the price of coverage is pretty steep. For example in Mexican standoff between buyers and sellers, the buyers are waiting for somebody to blink. And given that it's already a few days into hurricane season, some blinking is going to happen soon. If there's a moderate hurricane season, we are concerned that there will be a bloodbath in the fall in pricing, as perceived excess capacity may push top-line thinking to take over overnight."
This illustrates the helplessness of even global insurance leaders to tackle their own insider indiscipline.
No comments:
Post a Comment