Increased climate change-related risk needs to be incorporated into insurers’ modelling, Lloyd’s says.

15 May 2013 — Insurer Lloyd’s of London has called on insurers to incorporate climate change into their models.

In its report, Catastrophe Modelling and Climate Change, the 326-year-old LLoyds – a partially mutualised marketplace where underwriters, individuals and corporations come together to pool and spread risk – said it was important that insurers’ catastrophe modelling tools kept pace with the effects of climate change.

Lloyd’s said that re-evaluation of insurers’ model was increasingly important as the scientific consensus on the effects of climate change strengthened and effects began to be felt.

Lloyd’s chairman John Nelson said “virtually every class of business we write” was affected by rising temperatures and increases in catastrophic events.

“Of course there are the obvious business areas that are affected like property, catastrophe and crop insurance, but Superstorm Sandy [in the United States] was responsible for claims of up to half a billion dollars for fine art, which is less surprising when you consider that beachfront homes command large real estate prices,” Mr Nelson said in a piece on the Lloyd’s website.

Mr Lloyd said the insurance and building industries had good relationships and could work towards increased resilience.

“We can work together as an industry to mitigate the impact of climate change through adaptation – this means, for example, using water membrane bricks or building houses on stilts to reduce the effect of floods,” he said.

“Insurers have a close relationship with the building industry. I think we can be proud at what this partnership has achieved on reducing the risk from earthquakes – by encouraging the use of building codes in policy documents which encourage adaptation to risks. Can we do the same for climate change induced flooding now?”

Climate change was going to occur even if strong action was taken to cut greenhouse gases, Trevor Maynard, leader of Lloyd’s exposure management and reinsurance team said, so policymakers and planners would have to make use of climate model projections, but take account of uncertainty in them.

“Catastrophe models calculate financial impacts from potential events in the next year or so,” Mr Maynard said. “Planners need to consider how the risk will change over the term of their projects.”

Climate change projection based approaches were especially important for those making long-term commitments, “for example, insuring or investing in infrastructure”, the report stated.

The report said that climate-related losses around the world had increased from $50 billion a year in the 1980s to nearly $200 billion a year over the last 10 years.

Read the full report.