Climate change is (if you will pardon the pun) a hot topic at present, and about to be the focus of a major international meeting in Paris.
Of course, whether or not the Anthropocene truly is a new epoch, and whether or not trends in temperature and weather-related events are the result of global warming caused by rising emissions of so-called “greenhouse gasses” remains a matter of some controversy; because, even though it seems clear that the balance of scientific evidence demonstrates a causal connection between human action and changes in many aspects of the earth’s climate, there is still scope for “deniers” to claim that the link is not proven, but the result of some dark conspiracy. As such, the situation reminds us of the tobacco industry and its fight to discredit or obscure the connection between tobacco consumption and rates of cancer development.
Naturally, this topic is of huge interest and relevance to the (re)insurance industry- and not just in terms of the frequency and scale of natural catastrophes, such as hurricanes or flooding.
As the Governor of the Bank of England, Mark Carney, pointed out in a recent speech delivered to the Lloyd’s Market, we are faced not only with long-standing issues related to the “tragedy of the commons” (such as over-fishing), but also now face the “tragedy of the horizon”, because the impact of climate change will be felt primarily over a timeframe well beyond a generation, or even a human life-span, making it even more difficult than usual to address the sort of intertemporal issues so beloved of economists. Of course, with climate change, negative outcomes are not just potentially economic, but existential.
So, if, as Mr. Carney stated, monetary policy tends to have a horizon of 2 to 3 years; management of financial stability a bit longer; and a credit cycle most likely no more than 10 years, how can one expect individuals and enterprises that are too often driven by short-term considerations to act sooner rather than later and to address a seeming tail risk, for which, if one is “wrong”, the sunk costs will be huge?
Clearly, the risks as well as the opportunities for the (re)insurance industry are potentially of a scale that may well dwarf anything else, affecting not just the liability but the asset side, as well as the capital account; perhaps finally putting to productive use the still-rising surfeit of capital that bedevils much of the industry.
Old assumptions and mindsets will be challenged, and underwriters and risk managers will have to assess, analyze and select risks in a much more holistic way, as will their peers on the asset management teams. Boards and executive management, who determine strategy and allocate capital, will need the skills, experience and resolve to make decisions that will have long-term consequences, while being able to absorb and deploy new information as it becomes available. There will be pain, anger, controversy and often fundamental disagreement; so the quality and effectiveness of a firm’s governance will be a key competitive advantage.
At Awbury, we believe that being intellectually open, honest and flexible; and being able to understand and distil the management of complex risks into elegant and effective solutions will remain core characteristics of our approach to building our business and supporting our partners and clients. Intellectual capital will become increasingly valuable, as we navigate the opportunities and threats to come. You should challenge us to evidence that!
The Awbury Team