Stakeholder Trends and Insights
Lloyd’s of London:
Insurers Must Factor in Climate Change Risk

Lloyd’s of London, the world’s oldest insurance market, has released a report calling on insurers to consider climate change in their catastrophe models.

The report, Catastrophe Modelling and Climate Change, says climate change is expected to continue to occur even if strong action is taken to cut greenhouse gases (GHGs). Lloyd's says insurers could soon be hit by “surprising or irreversible” pervasive impacts, pointing to the recent report from the Intergovernmental Panel on Climate Change (IPCC), which said no country would be left untouched by climate change.

“The urgent need to mitigate carbon emissions remains as critical now as before,” said Trevor Maynard, leader of Lloyd’s exposure management and reinsurance team. “Catastrophe models calculate financial impact from potential events in the next year or so. Planners need to consider how the risk will change over the term of their projects.”

Models used to measure risk should be revised annually to account for changing weather patterns, Lloyd's says. In the report, the company warns that models represent an approximation of expected outcomes and are only one tool used to enhance the understanding and management of risk. Newly available loss data, a better understanding of the science of natural hazards and advances in computing capability and technology all contribute to the evolution of catastrophe models, according to the report.

Insurers are facing an increasing number and severity of extreme weather events such as hurricanes, flooding and drought. Extreme weather, from Superstorm Sandy to the worst drought in decades, caused $35 billion in privately insured property losses last year — according to Lloyd's — and cost US taxpayers over $100 billion, according to a report Ceres released in November.

In March 2013, the Ceres report, Insurer Climate Risk Disclosure Survey: 2012 Findings & Recommendations, found that only one in eight insurers said they have in-depth climate change strategies.

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