Insurers Take Cover in Australia with Global Warming Risks

Source: The Age/Australia
[May 22, 2006]

INSURANCE products linked to climate change may be introduced in Australia.

Bruce Thomas, a sustainability expert with reinsurer Swiss Re, told The Age he expected Australia to follow other countries where insurance had taken account of the effects of global warming.

"There are certain amounts of warming that are already built into the global climate system," Mr Thomas said. "The in-built increases in temperature as a result of CO 2 emissions that have already occurred mean that even if we do something dramatic starting today, or even next year, we will still see warming, and therefore likely climate change, during the first half of the 21st century."

Swiss Re joined Westpac, Insurance Australia Group, Origin Energy, BP, Visy and the Australian Conservation Foundation last month in a statement attempting to raise the corporate profile of carbon awareness.

But Mr Thomas said business interest in climate change was not soft or altruistic. Trends in environmental economics, including trading of carbon credits, offered opportunities for the financial services industry to create products and price the new risks.

Insurance companies buy risks — for example, the risk that a house may burn down or a car may be stolen — from people and companies. When a large number of policies representing a basket of risks has accumulated, reinsurers buy the bundle and sell it back to a market, usually as bonds. This disperses the risk of one company collapsing, protecting consumers.

Mr Thomas said markets had struggled to price carbon emissions, but consensus was growing. Swiss Re last year joined the Chicago Climate Exchange, where it trades greenhouse gas emissions.

"Boards and directors of management of companies will look at ways of gaining either an advantage or looking at ways they can deal with it at a price," Mr Thomas said. "If carbon has a price of zero, then in some ways (emission awareness) is just a feel-good type of thing.

"But if carbon has a price, someone responsible for emissions of 1000 tonnes a year can look at mitigation strategies."

ACF's sustainability program manager Erwin Jackson said pricing risks had caused ructions among business, environmentalists and governments for decades.

He said there was no clear, long-term framework to give industries the confidence to invest large sums to reduce emissions.

"If you're a company that wants to build a gas-fired power station, for example, you can't justify it to your board because you don't know what the price of carbon is going to be in the future," he said.

"If you're a bank wanting to assess the carbon liabilities of a company that you are going to invest in, you can't properly assess the risks associated with future climate policy."

The price of emitted carbon has troubled economists seeking to develop a a carbon trading market. Mr Jackson said economic literature on the subject had arrived at a mid-range price of about $50 a tonne of carbon, but some estimates put the price as high as $600 a tonne.