Mark Carney on climate risk and insurance

I’ve been saying for a couple of years that the insurance industry could be one of the most powerful voices in stopping climate change. If the political establishment doesn’t have the will to tackle the problem, insurers will do the maths on what climate change could do to their industry – and to the economy in knock-on effects – and they’ll start lobbying for action. See previous posts here or here.

Having made that case, it was great to hear Bank of England governor Mark Carney arguing that “shifts in our climate bring potentially profound implications for insurers” in a speech to Lloyds last week.

While there is always room for scientific disagreement about climate change (as there is with any scientific issue) I have found that insurers are amongst the most determined advocates for tackling it sooner rather than later. And little wonder. While others have been debating the theory, you have been dealing with the reality:

Since the 1980s the number of registered weather-related loss events has tripled; and inflation-adjusted insurance losses from these events have increased from an annual average of around $10bn in the 1980s to around $50bn over the past decade.

Carney went on to talk about three different ways that the climate could pose a risk to the global economy. The first is a physical risk – the damage from storms and weather events, and the cost of clearing them up and rebuilding. Secondly, there’s a liability risk – people could seek compensation from those they hold responsible for climate change effects. And third, there are transition risks, such as the threat of the ‘carbon bubble’, where fossil fuel stocks become stranded by climate change legislation and the shift to renewable energy.

One of the most important wings of the climate movement at the moment is groups like Carbon Tracker who can reach the finance industry. Rather than making scientific arguments or relying on mass protest, it’s all about the language of risk – if big banks and insurers begin to factor climate risk into their business models, they will understand the need for action. And if the banking and insurance giants demand it, people like George Osborne will listen. All of which makes Mr Carney’s speech very welcome. As he says:

“Insurers are amongst those with the greatest incentives to understand and tackle climate change in the short term. Your motives are sharpened by commercial concern as capitalists and by moral considerations as global citizens. And your response is at the cutting edge of the understanding and management of risks arising from climate change.”