Insurers Jump on the Environmental Bandwagon

Although it’s becoming increasingly accepted that addressing global warming and curbing greenhouse gas emissions might be economically beneficial in a general sense, the June 5th issue of U.S. News & World Report describes how some individual businesses are already cashing in on new environmental efforts:

The climate strategies the insurers have spelled out aren't about avoiding losses; they're about generating revenue. For example, AIG aims to get in on Europe's carbon-trading scheme, a market valued at $10 billion last year and, although climbing out of a precipitous fall a few weeks ago, one that is expected to surpass $25 billion in 2006. Even though the United States has not signed on to Kyoto and does not participate, AIG says it will invest in projects around the globe aimed at generating credits to trade on this market. (Buyers would be factories or power companies that are struggling to meet their emissions limits under the treaty.)

Karl Schultz of the consulting group Energy Edge in London says there's "something of a feeding frenzy" of investors clamoring for United Nations approval of their green energy projects so they can trade credits. "Now you're seeing a whole new breed of people coming out of the more traditional financial institutions--the pure business suits as opposed to suits that carry the green badge," Schultz says. AIG also wants to advise corporations, consulting with them on how to get into the carbon market and even developing a new insurance policy to protect against the risk of a project's failure to generate tradable credits.

Although these corporations are just looking out for themselves and their profits, now the incentives are there to help their interests more closely align with those of the environment. In a sense, this is science and technology policy at its best, with specific government requirements spurring innovations that should offer a benefit to society in general. Until the US gets on board and ratifies Kyoto, though, the incentives will probably not be strong enough to have the desired effect.

The U.S. News article also mentions the possibility that insurers are gaining a “new climate awareness” in part because of the severity (and associated costs) of recent hurricane seasons, a phenomenon that could be related to global warming. Although the extent to which global warming has increased the frequency and intensity of hurricanes is still a scientifically controversial topic, an increase in ocean temperature would be expected to have those effects. To that end, today’s New York Times reports on two upcoming studies that demonstrate a correlation between hurricane strength and intensity and increasing temperatures:

In one new paper, to appear in a coming issue of Geophysical Research Letters, Matthew Huber of the Purdue department of earth and atmospheric sciences and Ryan L. Sriver, a graduate student there, calculate the total damage that could be caused by storms worldwide, using data normally applied to reconciling weather forecast models with observed weather events.

The Purdue scientists found that their results matched earlier work by Kerry A. Emanuel, a hurricane expert at M.I.T. Dr. Emanuel has argued that global warming, specifically the warming of the tropical oceans, is already increasing the power expended by hurricanes….

… In a statement accompanying the release of the study, Dr. Huber said the results were important because the overall measure of cyclone activity, whether through more intense storms or more frequent storms, had doubled with a one-quarter-degree increase in average global temperature.

In the other new study, Dr. Emanuel and Michael E. Mann, a meteorologist at Pennsylvania State University, compared records of global sea surface temperatures with those of the tropical Atlantic and said the recent strengthening of hurricanes was attributable largely to the rise in ocean surface temperature.

Although I can’t really evaluate these studies without having access to them, these reports seem to give more empirical weight to an idea that is already conceptually solid. If these results are borne out, the trend in storm intensity wouldn’t be expected to change anytime soon on its own, so it’s not surprising that insurers are taking notice. Hopefully their newfound environmentally friendly activities can help reverse the trend.