Climate Change And The Insurance Industry Commerce Essay

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One of the most contentious issues and the biggest challenge world is facing today is that of climate change. While there has been some skepticism around the topic, many scientists and leading government organizations have stressed the seriousness of the threats that rising global temperatures pose for the planet and its inhabitants. Climate Change poses an enormous challenge for socio-economic and natural systems. It has been affecting the natural environment and consequently world economies and the way organizations are conducting their businesses. Understanding global warming is becoming imperative for businesses and governments so that they can assess the future repercussions of this phenomenon and mitigate its effects. This essay explores the issue of climate change, highlights major stakeholders and key events that affected policy making and legislation. In terms of the business interface, it discusses how climate change is impacting the business sector, particularly the insurance industry, and the industry's response to the issue.

Climate Change: The Issue

Since the industrial revolution, industrial activities that involve burning of fossil fuels have been major contributors of global greenhouse gas emissions. The third assessment report by the Intergovernmental Panel on Climate Change (IPCC) has provided strong evidence which suggests that global warming in the last 50 years has been largely due to human activity, i.e. carbon dioxide emissions from burning of fossil fuels. The report also states that the carbon dioxide level now is at the highest level in the last 125,000 years (Islam, 2010). Industries like coal mining, oil refining, petroleum fuel combustion, pulp and paper, cement production, and the transport sector have been mainly responsible for producing most of the anthropogenic greenhouse gases (Islam, 2010). Recent research has shown that global surface temperature has increased about 0.2 °C per decade in the past thirty years (Hansen, 2006). According to IPCC, human activities along with natural drivers such as volcanic aerosols, and increased output from the sun etc) are causing changes in global temperatures and that greenhouse gas increase in the atmosphere is the leading cause of the warming in the past century (Garnaut, 2011). In a 2007 report, the IPCC concluded that most of the warming since the mid 20th century was likely due to human induced increase in greenhouse gas concentrations (Garnaut, 2011). Rapidly melting ice has risen the sea levels 4-8 inches over the past century and worldwide precipitation has also increased by about one percent (Islam, 2010).

Figure 1 below demonstrates changes in global temperature over the past century (Islam, 2010).

Worldwide carbon dioxide emissions from fossil fuel combustion were 24,409 million metric tons in the year 2002. This number is projected to increase to 33,284 million metric tons by 2015 and 38,790 million metric tons by the year 2025 (Islam, 2010). Figure 2 below represents changes in CO2 concentration in the atmosphere after the year 1950 (Islam, 2010).

Climate Change: Key Events

Following is a timeline of global initiatives and key events on climate change that has affected policy making and legislation on an international level (Plan-ed).


Conference on Human Environment

First Global recognition that environment was endangered


Greenhouse Effect

Convention on Long Range Transboundary Air Pollution

World Climate Conference demands urgent action on "greenhouse effect."

International legally binding instrument to deal with air pollution


Convention for the Protection of the Ozone Layer

Created general obligation for countries to protect ozone layer


Bruntland Report "Our Common Future" published

Montreal Protocol

Dealt with sustainable development

Resulted in decline in manufacture and use of CFCs



The Intergovernmental Panel on Climate Change was formed


Earth Summit


UN conference on Environment and Development

United Nations Framework Convention on Climate Change was formed


UN Commission in Sustainable Development

To enhance international corporation and decision making capacity



The First Conference of the Parties: agreement on reducing GHG emissions


Kyoto Protocol

Countries agreed on reducing GHG's and Kyoto Protocol was passed


Bonn & Marrakech

IPCCC called the conference to convince other countries to reduce emissions


Johannesburg Summit

World Summit on Sustainable Development



Adaptation of Bali roadmap-decisions on technology transfers, reduction of emissions



Global climate agreement to ensure long term security of energy supply


Stakeholders related to the issue of climate change would be people, regions, industries or communities that are impacted by or are potentially vulnerable to climate change. Relevant stakeholders and their roles are highlighted in the Table 2 below (Gardner, 2009).


Specific communities or regions in sensitive locations that are vulnerable to the effects of climate change


Federal, State and Local governments play a key role in policymaking and regulation which can help mitigate the effects of climate change

Infrastructure Management Agencies

Responsible for managing major infrastructure such as ports, air, land transport, water, energy and property.

Particular Industries

Forestry, fisheries, mining, and automobile industries are responsible for majority of the GHG emissions and can play a key role in countering global warming

Nongovernmental Organizations

NGO's are important because they are often involved with issues that concern the environment and indigenous people.

Societal, Regulatory, Legal Context of Climate Change:

At an international level, there are two frameworks (UNFCCC, Kyoto Protocol) that address the issue of climate change. These frameworks have helped countries acknowledge the problem and assisted in reductions of greenhouse gases.

The United Nations Framework Convention on Climate Change (UNFCCC) intends to achieve stabilization in greenhouse gas emissions globally. This is a legally non binding Convention that applies a minimum standard of emissions on its signatories (Native Title Report, 2008).

The Kyoto Protocol to the UNFCCC is an international agreement that sets binding targets and timetables for emissions reductions for developed countries. Kyoto Protocol commits its signatory countries to meet their targets and requires them to submit an annual emissions inventory report and national report (Native Title Report, 2008).

At the social level, the International Human Rights Framework identifies and protects basic, fundamental rights that all human beings are entitled to. This includes threats from particular situations such as climate change. The framework also covers issues of ownership of traditional lands and territories, natural and cultural heritage, biodiversity, intellectual property rights, poverty reduction, and economic development. This framework is linked to other international instruments such as the Universal Declaration of Human Rights (UDHR), the International Covenant on Civil and Political Rights (ICCPR), and the International Covenant on Economic, Social and Cultural Rights (ICESCR) (Native Title Report, 2008). The United Nations Permanent Forum on Indigenous Issues (UNPFII) advises on indigenous issues related to education, health, environment, economic and social development and human rights (Native Title Report, 2008).

At the domestic level, Australia has developed its own climate change policy and legal framework that allows for indigenous participation in carbon markets by encouraging partnerships between the private sector and indigenous communities and conducting research around scientific and market potential (Native Title Report, 2008). The Australian government has also commissioned reviews to assess the impacts and challenges on climate change in Australia. These reviews include The Garnaut Review which evaluates the costs and benefits of mitigating climate change, and the Green Paper which introduces the Carbon Pollution Reduction Scheme (CPRS). The CPRS or the emissions trading scheme aims on reducing greenhouse gas emissions through efficient, low cost strategies (Native Title Report, 2008). At the federal level, the Environmental Protection and Biodiversity Conservation Act (EPBCA) provides a legal framework to protect and manage matters of environmental significance which includes flora, fauna, world heritage sites, wetlands of international importance, and nationally threatened species (Native Title Report, 2008).

Business Interface: Impact and Response

There is enough evidence to support that global temperatures are rising and it is largely due to human induced warming. Concern over rising global temperatures and changing climate has severely impacted business activity around the world. Managers and leaders are preparing themselves to deal with a range of climate related issues that may impact their business. These issues include increased risk of drought, desertification, melting ice, flooding, hurricane activity and mass economic migration from harshly affected areas. Businesses are also learning to respond to increasing awareness in public regarding climate change (Romilly, 2007).

Impact on the Insurance Industry:

Insurance is one of the biggest industries in the world today, and climatic events will have a big impact on this sector. Recent hurricane activity, flooding and droughts around the world due to warming ocean has incurred losses in billions of dollars for the insurance industry. For example, Hurricane Katrina incurred economic losses of around US $135 billion and insurance losses of around US $ 45 billion, making it the most expensive insured loss in the United States. After the 2005 Hurricane Katrina, it was recognized that current catastrophe models do not properly reflect the loss exposure to natural catastrophes and that more work needs to be done to improve the forecasting models. Instead of just focusing on the number of extreme weather events in an area, the catastrophe model should "quantify the extent of the clustering of these extreme events which would mean higher insurance premiums" (Romilly, 2007). Insurance companies usually use historical weather data to forecast future events. With weather patterns becoming more unpredictable, insurance companies (particularly property insurers) are having trouble forecasting the cost of claims. Even though Hurricane Andrew was not as catastrophic as Hurricane Katrina, it still caused $25 billion in damages of which insurance companies had sustained $17 billion. The impact of the losses was such that it bankrupted nine small insurance companies in Florida. Since Andrew, insurance rates in Florida have gone up and many small insurers have closed their business while large companies have excluded hurricane damage coverage (Tucker, 1997).

Response of the industry:

In response to the uncertainty surrounding climate change, insurance companies have taken various steps from abandoning riskier markets, to raising premiums, insisting on greater deductibles, and refusing to insure property without owners agreeing on taking protective measures (Tucker, 1997). Fifty insurance companies worldwide have signed the United Nation's Statement of Environmental Commitment by the Insurance Industry, pledging to support sustainable development, environmental management, public awareness and communications (Tucker, 1997). Insurance companies like General Re, Chubb Corporation, St. Paul Companies, SAFECO, and USF and G have been taking steps to become socially responsible by taking climate change into account when estimating expected losses, favoring industries with low emissions, promoting good environmental practices and becoming active in public awareness and climate formulation (Tucker, 1997). While a lot of climate change related impact on the business sector is negative, many businesses are starting to recognize the potential opportunities in adapting to the changing conditions. Shifting from carbon to low carbon technology will affect the oil industries negatively but at the same time it will give a competitive edge to alternative energy businesses. Construction industry will benefit as people will start to relocate to areas away from the coastal zone and increase flood protection measures (Romilly, 2007).

Case Study:

Following is a case study about an insurance company's response to the climate change issue. It describes how Travelers insurance company has adapted to changing conditions by altering their business structure and modifying products and services and what sort of response it is receiving.

The Travelers Companies, Inc is one of the largest providers of insurance products in the United States with representatives in every US state and in Canada, Ireland, Singapore and the UK. It provides personal, commercial property and causality insurance products. It also provides insurance to small businesses as well as to Fortune 100 corporations. Not only do they provide property and liability coverage to businesses, but they also offer bespoke products and to construction, transportation and oil and gas industry (Sussman, 2008). Travelers is one of the insurance companies to realize the importance of adapting to the changing climate and has recently joined the Pew Center's Business Environmental Leadership Council (BELC). After the 2004 and 2005 Atlantic hurricane seasons, Travelers decided to change its approach to climate change and formed internal working groups to assess the risks and opportunities associated with the issue (Sussman, 2008).

Travelers has taken specific actions in response to the issue of climate change:

Reassessing coastal underwriting practices. As per the definition of coastal areas, they are now farther inland than what they used to be. Coastal customers now share greater risk than before and are provided with incentives to encourage them to engage in loss control and adaptation activities (Sussman, 2008).

Updating catastrophe modeling. Due to uncertainty of climate change and increasing frequency and intensity of weather related natural disasters, Travelers recently joined an effort initiated by the Center for Health and the Global Environment at Harvard Medical School to focus on how catastrophe models can help integrate climate science into their models that help predict potential catastrophic losses (Sussman, 2008).

Offering "Risk Control" services. Travelers has been providing consultancy services to people and businesses to help them mitigate potential losses and assist with adaptation to the changing climate. These services include monitoring building code standards and regulations in support of building resiliency, assisting with disaster preparedness planning, and delivering business continuity training (Sussman, 2008).

Redesigning pricing. Travelers offers incentives to homeowners who take protective measures by installing storm resistant building components such as shutters, and fortifies roofs that will withstand severe weather. Businesses are offered incentives if they build according to the catastrophe resistant building codes (Sussman, 2008).

Engaging in community and government outreach. Travelers has been spreading disaster awareness and encouraging homeowners and businesses to prepare for prospective natural calamities. They have extended their awareness efforts to government bodies and have been informing them about benefits of long term mitigation strategies which include adoption of imposing strict building codes and enhanced land use planning (Sussman, 2008).

Other than the above-mentioned strategies, Travelers has been providing incentives and discounts to owners of hybrid cars and "green" commercial buildings (Sussman, 2008).


According to a study conducted by the Institute for Business and Home safety (IBHS), enforcement of modern engineering design-based building codes has a positive impact on the performance of homes during Hurricane Charlie in 2004. The study found out that frequency of claims dropped by 60 percent and claims that were filed were 42 percent less severe during the loss for homes that were built according to the new building codes (Sussman, 2008).

Conclusion: Current trends, Future responses, Potential implications

Insurance providers are increasingly realizing the importance of reducing risk and maintaining a brand value instead of just focusing on financial risk management. Current response of insurance companies to climate change is more focused on new markets and benefits associated with reducing the severity of climate change impacts by mitigating greenhouse gas emissions (White, 2008). Many large scale insurers have been focusing on providing insurance coverage to businesses that use clean energy technologies. Examples include, AIG's Global Alternative Energy Practice, Allianz's Climate Solutions and Chubb's Green Energy Team (Responding to CC-Mills). Adaptation is the key to survival for any business in a changing environment. There is not much that insurance companies can do to prevent climate related natural disasters, but being the biggest and the wealthiest industry in the world, it can encourage people and businesses to take precautionary measures to deal with climate change by spreading awareness and providing them incentives and discounts.