While the upcoming United Nations climate conference in Copenhagen will aim for a new treaty to replace the Kyoto Protocol of 1997, the reinsurance and insurance industries are putting climate change mitigation measures on their strategic agenda.

A host of projects are ongoing related to insurance coverage to combat climate change risks and to support renewable energy development around the world, said Peter Hoeppe, head of the Georisk unit at Munich Re [85011].

The study of natural catastrophe trends based on historical data is one crucial area in examining climate change risks and to increase public awareness, said Hoeppe. Munich Re is looking into risk protection for the development of renewable energy.

The changing natural and business environment has placed the reinsurance industry in a different context in terms of business and product development. Munich Re said in recent report the group puts climate change and Solvency II on top of a strategic focus on future challenges.

"Merely providing capacities at competitive prices will no longer offer sufficient potential in the future. What is needed are providers with a thorough knowledge of risk who can offer this know-how to their clients," said Torsten Jeworrek, a member of Munich Re's management board.

December's Copenhagen climate conference will seek an agreement on a climate treaty, including the regulation of greenhouse gas emissions. The new treaty would have significance implications for insurance risk management, according to Munich Re.

Developing and developed countries should find common ground on climate change risks, said Hoeppe. A global insurance pool is being proposed, to be funded with countries' premium contributions based on their level of greenhouse gas emissions.

In the past decades, industrial nations and their high consumption of natural resources have had the majority impact on global climate. However, poor countries have suffered most from the effect of climate change as poverty makes people vulnerable to extreme weather events, said Thomas Loster, chairman of the Munich Re Foundation, in a report.

Recent natural perils including windstorms, flooding and earthquakes in Asian countries such as the Philippines, Indonesia and Taiwan made local communities vulnerable to enormous losses in property, infrastructures and lives.

Risk Solutions

In Asia, the economic consequences of natural perils are as much an issue as the increasing threat of severe weather events because most countries lack adequate financial protection.

In 2008, natural catastrophes caused global economic losses of about US$200 billion, of which Asia represents 59% of the losses. However, Asia only accounted for 5% of the global insured amount of US$45 billion, according to Munich Re's report.

The gap in necessary insurance capacity has triggered various risk mitigation approaches across Asia, where economic development and insurance penetration varies considerably among countries.

Insurance mechanisms are part of the solution to mitigating financial consequences of severe weather events, which often leave an enormous economic and social burden on local communities.

A climate insurance pool is one level of an insurance protection pillar, covering a predefined proportion of major loss events in developing countries. The annual cost of US$5 billion would be raised by industrial countries by means of an adaptation fund, according to Munich Re.

Another level of the insurance pillar is to promote public-private partnerships and private climate insurance, covering smaller loss events. This would focus on domestic institutions through local micro-insurance policies. The cost of such a program is around US$3 billion, according to Munich Re.

Southeast Asia has a relatively high exposure to windstorms and widespread flooding. But insurance penetration is low in this region. "We would like to increase insurance coverage by different ways" including a public-private partnership and a global insurance pool, said Hoeppe.

Developing countries are the worst affected by climate change as most nations are located in region where climate change threatens their very means of existence, while they lack the necessary capacity to adapt.

Climate change is a reality based on scientific evidence and studies, said Hoeppe. An increase in frequency and severity of natural catastrophes has to be expected, he added.

According to Munich Re, climate change brought a rise of sea surface temperature by 0.5 degree Celsius. In the past 35 years, the reinsurer's study found a steady rise of sea surface temperate has contributed to increasing strength of storms in the world's six ocean basins.

Asia experienced three times more weather events like bush fires, heat waves, storms and floods between 1980 to 2009, said Hoeppe. India reported new records of precipitation as days of monsoon rainfall were double than that of the 1950s. This February, Australia had severe bush fires in Victoria state.

The number of devastating natural catastrophes that cause losses above US$500 million or at least 500 fatalities showed a clear jump from about 15 incidents per year at the beginning of 1980s to 35 now, said Munich Re in its report.

On a global average, natural catastrophe losses increased about 11% per year. The rise was about 3% to 4% by taking into account inflation and gross domestic product growth. The highest increase was in Asia and North America because of the impact of tropical storms, according to Munich Re.

In the post-Kyoto negotiations for the next protocol in Copenhagen, there will be discussion on compensation and liability. The issue of climate change will be focused on human activities, according to Hoeppe. There would be some lawsuits in terms of liability for climate change, but that trend is not obvious.

"Two years ago, compensation was [not discussed] in the framework of the United Nations negotiations. Now everybody talks about compensation," said Munich Re in its report. "The next step could then be perhaps liability or something like that. Things are developing quite quickly and they want compensation from the polluters."

"The impact of climate change litigation on liability insurance seems to be mainly limited to defense costs and coverage of violations of the ever stricter regulations under [professional indemnity, errors & omissions and directors & officers]," said Munich Re in the report.