Insurance industry vulnerable to climate change
A report by Standard & Poor's Ratings Services highlights that the insurance industry is vulnerable to climate change. Changes brought about by climate change, such as higher capital requirements and an increase in weather-related claims, will negatively impact insurers' capital positions. According to the report, insurers' capital adequacy (their capital-to-risk ratio) will decline by 0.5% p.a. between 2016 and 2050. To compensate for this shortfall, many insurers may have to cut their dividend payments to shareholders by 5 to 10%. The report echoes warnings by Bank of England Governor, Mark Carney, that some insurers are undervaluing potential losses due to climate-related claims by up to 50%.

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As governments, businesses and pressure groups gear up for the key COP21 climate change forum in Paris next month, warnings on how global warming could hit businesses and investors are increasing in frequency. The insurance industry has been highlighted as being vulnerable to climate change by a new report released by Standard & Poor's Ratings Services.

The report, published this week, argues that changes brought about by climate change, such as higher capital requirements and an increase in weather-related claims, will negatively affect insurers' capital positions.

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According to the report, insurers' capital adequacy (their capital-to-risk ratio) will decline by 0.5 percent a year over the period of 2016 to 2050. To compensate for this shortfall, many insurers may have to cut their dividend payments to shareholders by 5 to 10 percent.

"Climate change could affect insurers' prospective capital adequacy through reducing earnings and by increasing the level of required capital, if its impact is not anticipated," the report says. "Earnings will be affected, not only by the potential for higher weather-related claims, but also through lower investment returns."

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The report's analysis echoes warnings made by Bank of England governor Mark Carney in September about the effect climate change will have on the insurance industry.

He pointed out that weather patterns are shifting and the number of weather-related insurance claims have tripled since the 1980s.

"The exposure of UK investors, including insurance companies, to these shifts is potentially huge," he said during the speech at a Lloyd's of London dinner. "The challenges currently posed by climate change pale in significance compared with what might come."

Carney also warned that some insurers are undervaluing their potential losses by up to 50 percent, as climate change and weather events could lead to more insurance claims.

Meanwhile, a recent report from asset management firm BlackRock examined the impact of climate change on investment portfolios.

The report, titled "The Price of Climate Change", focused on how government regulations are pushing towards a low-carbon economy. For instance, while the decarbonisation process will be gradual, fossil fuels are likely to decline as a source of energy generation.

According to the report, the coal industry is likely to decline and industries which rely on coal for tonnage, such as the railways and shipping, will be affected.

On the other hand, the drive towards greater energy efficiency will benefit innovative, disruptive energy solutions and new technology.

"Increasing energy efficiency is likely to eat into oil demand, throwing up potential investment opportunities" the report says. "It is spurring a wave of innovation across industries. Think of electric and hybrid vehicles, LED lighting, smart grids and lithium batteries. This is classic disruption, driven in large part by regulation meant to improve the environment."