13 July, 2006

"Climate Change: Adapt or Bust"... the Insurance Industry wakes up ...

Fact: Last year, natural catastrophes killed 97,000 people and cost the
insurance industry $83 billion more than ever before.

With new weather patterns, exposures are changing and insurers need to
act now, says the new Lloyd's report Climate Change: Adapt or Bust.

Despite debates around the causes and effects of climate change,
scientific evidence shows that global temperature, sea levels and rain
fall are rising faster than previously thought. And, if the industry
wants to survive, it must adapt its responses to these trends sooner
rather than later, says Lloyds.

That means investing both time and money in business-focused academic
research which will help the industry come up with workable risk models
- a key instrument for assessing risk exposure and therefore setting the
right price, terms and conditions.

At the moment, the industry is lagging behind. The fact that no-one has
an accurate picture of the financial impact climate change could have on
the industry is a clear indication that more needs to be done.

Lloyds says that the industry needs to stay ahead of the game by
taking a new approach to underwriting, with pricing and capital
allocation models regularly being updated to reflect the latest
scientific evidence.

For example, current sea levels are higher in the Gulf of Mexico than
in the past and, with sea temperatures rising, the industry must prepare
for increased windstorm activity. It also means that US hurricane
exposure will remain high and insurers need to plan for that. Risk
modelling and pricing are key factors which the industry cannot afford
to lose sight of.

Over the past few years, insurers have battled with record hurricane
seasons, a trend that is expected to continue. These changes mean that
long term historical data should not be the only tool that underwriters
use. As forecasting becomes more precise, underwriters should be able to
respond to the scientific predictions of each season ahead.

Rolf Tolle, Lloyds Director, Franchise Performance said: The models
the industry has been using up until now may not adequately anticipate
the pace of change. Thanks to scientific advances, underwriters can now
take into account the increasingly reliable predictions which exist for
the storm season immediately ahead, and factor these into their planning
and pricing.

He added: Although it's almost two decades since the UN recognized
that climate change was a catastrophic threat to earth, it's clear that
the insurance industry has not taken catastrophe trends seriously
enough. As an industry we must work together to understand and manage
these new risks, and to change our behaviour.

Today's risk environment is changing and evolving more rapidly than
ever before. So at Lloyds, understanding and anticipating major risk
trends is at the heart of all we do. Climate change is todays problem,
not tomorrows. If we don't take action now to understand the changing
nature of our planet and its impact, our industry will face

The report also says that the industry needs to figure out how to work
in partnership with governments and businesses to look for practical
solutions to help society adapt to climate change. Such partnerships
would help to mitigate risks such as the number of people living on
coastlines, and kickstart work to reduce CO2 emissions.

And although most natural perils are insurable ?as long as the market
is free to price risk adequately, Lloyds warns that long-term
insurability of weather-related risk is by no means guaranteed because
climate change is developing much faster than initially thought.

The message is clear, and is right there in the title Adapt or Bust.
As the report says in its introduction: Climate change is likely to
bring us all an even more uncertain future. If we do not take action now
to understand the risks and their impact, the changing climate could
kill us.

About the 360 Risk Project

The aim of the Lloyds 360 Risk Project is to generate discussion and
debate on how to manage risk in todays environment. This is a major
issue and one that will not be addressed easily or quickly. That is
why the Lloyds 360 Risk Project is a long-term initiative addressing
different aspects and elements of risk across a range of issues.

The first series is all about catastrophe trends - an issue that
concerns not just the insurance industry but everyone with an interest
in the future of our planet. This series will run over the coming months
and as it evolves we hope to understand more about catastrophe trends
and what the insurance industry and indeed the wider business world and society can do to cope with catastrophes.

Future series of the 360 Risk Project will address similar important
and wide-ranging issues. But, as the 360 Risk Project is all about
creating discussion and debate, we want your views on what topics we
should be addressing. Send us your ideas on what should be on the agenda by
emailing us at 360@lloyds.com