Thursday, September 29, 2005

Climate Sensitivity

Today's Financial Times reports that operators of offshore oil and gas platforms in the Gulf of Mexico may see dramatic increases in their insurance costs, in the aftermath of the two hurricanes. This won't surprise anyone, but it's worth spending a moment thinking about the signal it sends. Part of the expected increase is surely an effort to recover via premiums some of the substantial payouts that the insurers will be making over the next few months, reaching into the billions of dollars. But I believe we see the reflection of a heightened sense of risk here, as well.

While others have the luxury to engage in theoretical debates about whether or not climate change is occurring, and what its consequences might be, insurance companies sit on the front lines of this issue and seem to be taking it more seriously than many other sectors. Recent predictions that Atlantic hurricanes will be more intense, either as a result of climate change or as a function of something like a twenty-year cycle in ocean temperatures, elevate the risk being insured against and justify higher premiums.

As I've suggested previously, this is precisely the right way to approach climate change: as a business risk to be managed in the same way we manage other risks, systematically and comprehensively. Scientists and environmentalists may focus on melting glaciers and shifts in the distribution of animal species, as indicators of climate change, but insurance companies provide the "canary in the coalmine" for the economy, and for business in general.

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