Climatesure - ITIJ article


Published Thursday, January 04, 2007

A climate for change. Phil Denman's article from the January'07 edition of the International Travel Insurance Journal


A climate for change 

Hockey stick curves, carbon sequestration, tropospheric ozone - what on earth does this all mean?  Well these terms are going to be filling the news pages of the world press for next decade or so. It used to be Global Warming but now we're talking Climate Change.  Armageddon or enigma? - always were going to be two sides to a debate involving the future of the petroleum industry.  Well last week, Kofi Annan stated that the sceptics were ‘out of step, out of arguments and out of time'.  Strong words for the UN but I think he's right. Only time will tell for sure but one thing is certain, the travel and insurance sectors will provide an interesting window on the issue.

This is not a modern phenomenon.  The earth's ecosystems have been in flux since the beginning of time but more recently - principally the last 100 years - the post-industrialised world has introduced that ‘human' factor into the mix; this has, according to most climatologists, altered the natural cycle of things and set us on a perilous course.  For the purposes of this piece we'll assume that negative change is happening and that we humans have had a strong affect on proceedings.  The question then posed is now that everything's ruined what on earth can we do about it? And how do I do what's right whilst keeping my loss ratios down, profits up and actuaries happy?

From the start of the 1st industrial revolution in the late 18th century, the world's economy has been ‘powered' by burning of fossil fuels and this has seen the levels of co2 in our atmosphere increase from 280 parts per million (ppm) to 430 ppm.   Once accepted, it is this relationship between the levels of atmospheric co2 and climatic change that form the basis for an adaptive approach to limiting the effects of climate change. 

Both international and UK domestic policy in this area has been formulated over the past decade - Kyoto was open to signature in 1997 - to ‘fix' the atmospheric co2 levels at around 450-550 ppm.  More recently the pace of the game has risen as we see the statutory instruments being assembled to ‘force' us towards a lower carbon economy.  This shift is important as it means that if we do not act ourselves, prescriptive regulation will ensue.

Carbon literacy is a keystone to moving public and corporate opinion forward.  It describes a point where consumers and businesses alike recognise the true costs of the goods they produce or purchase - including their impact on the planet.  Once these costs are recognised through transparent pricing models, levies or taxation, demand will begin to shift as carbon heavy products look less attractive against their climate friendly competitors.  It is through this process that the movement towards a lower carbon economy begins; pushed by policy, pulled by consumers.  Further, this process will accelerate as greener brands compete for business on a green ticket - slamming the carbon heavy competition.

First a little context as to how the travel insurance sector could be affected by climatic change.  One of the most significant tourism migrations is from Northern Europe to the Mediterranean each summer.  If we consider the European readership of this journal for a moment, it is fairly safe to assume that this represents the predominant focus for everything they do; insurers, brokers and medical assistance companies live on these high volume international movements of travellers.  This movement is purely voluntary and is incredibly sensitive to changes in weather and natural amenity; the very same attributes that are at risk from climate change.

The ‘exceptionally' hot 2003 European summer is believed to have claimed 35,000 additional lives and triggered agricultural losses valued at $15bn.  Under a high emissions scenario - i.e. we adopt a ‘business as usual' approach to climate change - this type of summer would become the norm in Spain by 2020 and the European biannual norm by 2050 (Parry 2000).  Taking a more optimistic view, with Kyoto targets in sight, the Iberian Peninsula is still predicted to see up to 6 weeks per year of days over 35oC, with rainfall down by as much as 30% (WWF Climate Scenario).  Even at this level, the Southern Mediterranean region would experience severe water resource difficulties, especially during the traditional summer holiday season, and their ability to support tourism at its current levels would be under immense pressure. 

Looking over the Atlantic to another principle tourist movement, we should consider the impacts of climate change on the Caribbean and Florida peninsula.  Much has been made of the recent upturn in hurricane frequency but there is little reliable evidence that this is anything other than the up-curve of a natural cycle.  However, there would appear to be a strong relationship between sea surface temperatures (SST) and the intensity of hurricanes - the warmer the SST the higher the average storm intensity.  The number of Category 4 and 5 hurricanes has almost doubled in the last 30 years (Emanuel, K. 2005) and this trend is expected to continue as rising SST's are pretty much a given for the next 50 years.  Couple this to changing storm location patterns and the core tourism areas of central Florida may well be exposed to the full force of the Atlantic storm season. Combine this with rising sea levels and we have a combination of elements that will certainly challenge this area and its tourism industry.

Take a moment or two to note the timings.  This is not some sci-fi assessment of the future.  The changes are happening now and the effects are already being felt.  The economics of climate change have, until now, gone largely unreported and but the winds of change have certainly begun in the UK, with the Treasury commissioned Stern Review.  This report costs the social consequences of climate change and, more specifically the costs associated with delays in achieving emission targets. 

Here are just a few highlights and I think they provide an interesting backdrop to any boardroom discussions on whether climate change should be a ‘Day 1 priority':

  • Comparative social cost this century between doing nothing and starting today on a path towards a stable 550 ppm co2 by 2050 is in the order of $2.5trillion
  • Estimated costs of technologies and efficiencies to achieve 550 ppm co2 stabilisation is likely to be around 1% GDP over the next 50 years
  • If left unabated the worst case scenario for this century could see the cost of correction reach 20% of GDP - this is equivalent to the impact of both the World Wars plus the Great Depression combined. 

To provide some balance, the earth is immensely robust with an enormous capability to adapt to the changing forces of both natural and unnatural origin but is it right for us to rely on our planet to protect itself?  Maybe, but don't assume that the planet will protect us as it adjusts to the forces exerted on it.  Let us not forget that in previous climate shifts, it was the fauna and flora that adapted to changing temperatures.  Are we that adaptable anymore?

So there's the call to action as the PR gurus would say; but what can we do as an industry?

As travel insurers, assistance companies, hospitals, brokers we deal with risk every day; we weigh up the alternatives and act appropriately, in the best interests of the people we serve.  I would assert that the insurance fraternity's assessment of this complex, abstract risk will be a principal factor in how we are perceived in the future.  As sea levels rise and floods occur, as crops fail and medical needs increase the public (our policyholders) will expect us to be squarely behind them.  Risk is our game and they will expect us to know our stuff and be leading from the front.

Malcolm Tarling, Association of British Insurers

"Climate change is a very important issue for the ABI and our members.  ABI commissioned research shows that the worldwide costs of major storms could increase by two thirds to £15billion in an average year. Insurers are committed to continuing to provide the insurance protection customers need. To enable them to do this we must adapt to and mitigate the impacts of climate change."

However, I am not sure we are.  Obviously, Munich Re, Swiss Re, Allianz and co have a more macro view at the reinsurance level and these guys are pushing forward a whole raft of carbon management research and risk management initiatives; but I still see very little happening further down the chain.  Evidently, few of us would need a Geo Risk division like these companies but the silence is deafening from the travel insurance sector.  As I sit here typing on deadline day, I am furtively thumbing the business card index to find anyone with a story of positive action. 

As one leading UK travel insurer put it

"Sorry, this subject leaves me cold.........but at this precise moment it simply isn't on my radar, whereas travel agent regulation, Gender Directive, age discrimination are."

This trade-off is typical to our hectic, pressurised business and personal lives but it is one where, I would suggest, the balance of power will shift and not in the too distant future.

We recognised (hoped for) this shift when we launched climatesure.co.uk in March this year; an internet insurance intermediary selling environmentally focused travel and motor insurance, with carbon offsets built into the products.  Essentially, this allows our customers to calculate the carbon cost of their driving or flying and balance these at the point of purchase.  It was the first offering of its kind and has allowed us to achieve an important insight into this market segment.  Commercially, it is early days, and I have the same challenges that any web insurance business has in acquiring ‘traffic'; but it has been, and continues to be a wholly positive experience.

Aside from providing a new product offering to an ever growing fraternity of ethically inclined and climate savvy customers, we are now considered as an ‘early adopter' brand.  This exposure has attracted attention from entities that would not normally associate themselves with a small start-up, insurance business and is already producing top line growth for Climatesure and our associated companies.  The pull-through effect this creates has permeated throughout our group with customers, employees and stakeholders all beginning to recognise the close synergy between the future of the planet and the future of business.  We believe that this type of brand alignment will set us apart from our peers today and will be a must have in tomorrows market.

But for me the starting point for any company has got to be internal, looking at the ‘carbon footprint' of your own organisation.  From there you can focus your efforts on an environmental impact plan; from staff awareness to recycling; energy efficiency to an eco-friendly transport programme.  It is only once you've got your own house in order that you should consider trying to project these values externally.  Duplicity is a high risk game in ethical marketing.

In the broader marketplace, the lack of clear environmental product messaging makes everything you do seem fresh to an as yet under exposed consumer.  Education is a key area where I think the travel insurance industry a can make a difference.  Our products enter the lives of consumers, millions of times a year at the point that they have purchased a travel itinerary that will, in the majority of cases, involve a flight or vehicle journey.  Research by the Co-operative Insurance Society a couple of years back suggested that the majority of people recognised that their modes of transport were contributing to greenhouse gas production - surely this would make the client receptive to messages at our point of purchase? 

Education leads to understanding, and the companies that can achieve environmental understanding within their customer bases will prosper as consumers change their focus.  Further, those companies that have proactively aligned their business models will be far better placed to regulatory changes as they come in.  Last week saw the UK Chancellor of the Exchequer doubled Air Passenger Duty to cries of foul play from both the airline industry and the environmentalists but I think the airlines may have to get used to higher eco-charges.

Andrew Smith, Chief Economist at KPMG

"Green taxes have to change behaviour... persuade people to use less energy and, in that sense, if it isn't hurting, it isn't working."

Ouch!  Add that to Civil Aviation Authority research suggesting that a £20 load on the £73 average short haul ticket would see 40% of customers thinking about staying on the ground (at a £30 load this rises to 66%!) and there really is some food for thought.

This actually highlights an important question; is it climate change itself or Government's attempt to react to it that will change our businesses over the next few years?  Strangely, I think the later may be easier for businesses and individuals to digest - increased taxes and energy costs will alter behaviour far more immediately than the potential for Armageddon - at £103 per ticket two thirds of Brits might stay at home!  Take heed those who are ‘left cold' by the concept.



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