Lloyd’s of London Urges Insurers to Factor in Climate Change Risk

Lloyd’s of London, the world’s oldest insurance market, is urging insurers to factor climate change  into their catastrophe models.

The report, “Catastrophe Modelling and Climate Change,” says climate change is expected to continue to happen even if strong action is taken to cut greenhouse gases. Policymakers and planners will have to use climate model projections, but take account of their uncertainty, says Trevor Maynard, head of exposure management and reinsurance at Lloyd’s.

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

Lloyd’s says models used to measure risk should be revised annually to account for changing weather patterns. Models represent an approximation of expected outcomes and are just one tool used to enhance the understanding and management of risk, Lloyd’s warns in its report.

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, the report says.

Insurers are faced with an increase in the number and severity of extreme weather events such as hurricanes, flooding and drought. Extreme weather — from Hurricane Sandy to the worst drought in 50 years — struck US insurers hard last year, generating $35 billion in privately insured property losses.

A study released this week by the White House says some effects of  climate change — such as a longer growing season in some regions and a longer shipping season on the Great Lakes — may benefit the economy in the short term. However, these benefits will be outweighed by mounting damages as droughts intensify, flooding increases and heat waves and forest fires become more frequent.

The National Climate Assessment, which assesses the impact of climate change in the US, says if greenhouse gases continue to worsen, warming could exceed 10 degrees by the end of the century.