The heat is on insurance companies

Andrew Torrance

Climate change is very much an issue on the agenda of insurance companies these days, and abnormal weather changes in different parts of the world have left them a worried lot, according to Andrew Torrance, chief executive officer of Allianz Cornhill, a British insurance major.

Mr. Torrance says the debate over climate change has moved on over the last 18 months. Now, there is pretty much a strong consensus in the scientific community that climate change is happening, that it is indeed happening now and that what is happening is pretty much man-influenced rather than random occurrences.

Meteorologists say the world is getting warmer, and this increased temperature means more energy getting dissipated in the form of thunderstorms or hurricanes. From the insurers' perspective, it is no good looking back to try and see what has happened to the weather historically. The fact is that insurers are looking at a world where there are increasingly severe weather events.

This has led to a scenario in which insurance firms are looking to create models of severe weather-incident impact on their portfolios and, in an increasing manner, laying off risk of loss above a certain limit to re-insurers.

"Allianz is buying more reinsurance than historically it has every done," Mr. Torrance said. "Our models are not those for predicting the weather, rather they are scenario-based models that tell us the damage that might be inflicted on a portfolio of property by, say, a wind storm of a particular intensity hitting the U.K."

He points out that going by historical weather or climate data may be a problem because, historically, a particular storm might have hit a particular coast only very rarely; that event may be a one-in-a-thousand occurrence. However, in the future, this storm might hit with more frequency.

So what does all this mean for the customers of insurance firms? Will weather changes ultimately mean costlier insurance packages? "Right now, all this has a relatively small impact. More exposures to severe weather and we can expect pressure on premiums and it would also mean that claim costs would be higher. Insurance is going to be more expensive for those with offshore oil rigs in the Gulf of Mexico," he said.

Mr. Torrance is also personally convinced that the world is warming up and something has to be done about it. As part of his company's commitment to energy-saving, its car pool in the U.K. now sports hybrid cars, while his company's offices are being made increasingly energy-efficient.

When Allianz was looking for space to set up shop in India a few years ago, it, like any other big company, looked at India's metros. However, even then, it was clear that the growth of infrastructure in the metros was not matching the cities' commercial expansion. Mr. Torrance points out that floods in Mumbai and in Chennai were basically problems of inadequate infrastructure to handle such events. All this is going to be very much on the minds of Allianz bosses as they go site-hunting in the country as part of their expansion plans.