Effects of Climate Change
The Copenhagen climate conference drew to a close December 18 and there was little resolution from one of the most anticipated climate conventions in world history. The purpose of the meeting was to come up with a way to rein in climate-altering emissions worldwide, but instead, the debate over which of the 192 United Nations countries should be mandated to lessen their carbon footprint-developing countries or wealthier nations-waged on. With much talk, but little progress regarding the management of emissions, all countries stand to face the effects of the Earth's changing climate, particularly the Northern European countries of the UK, Belgium, the Netherlands, Germany and Denmark. 

According to a recent Swiss Re focus report on the matter, coastal flood damage and winter storms in Northern Europe will become more severe and more frequent, triggering more intense storm surge events and drastic rise in sea levels. "The unfavorable impact of the tides, more intense surges and higher sea levels lead to an increase in peak surge heights of between 36% and 55% compared to today's levels, and consequently to a pronounced rise in coastal damage potential," states the report.

Swiss Re reports that currently, the annual expected loss burden from surge events stands at around ?600 million, however, the figure could rise to ?2.6 billion annual loss toward the end of the 21st century. Another recent report, issued by the World Wildlife Fund (WWF) and Allianz, focused on the risk that climate change poses to coastlines of the United States. The report estimates that the current assets at risk to a 1-in-100-year storm surge could amount to $1.4 trillion, while a mid-century sea rise of 20 inches (with an additional six inches along the Northeast U.S. coast) could jeopardize assets worth close to $7.4 trillion. And if that rare New York hurricane were to actually make landfall in the Big Apple, the report claims that damage from a Category 4 storm could range from $1 trillion to $4 trillion.

"With each new study, the alarm bells become deafeningly clear that climate change will have devastating consequences for our economy and way of life," said David Reed, senior vice president of policy at WWF.  "Time to address this issue is growing short."  

The common argument in both studies is that coastal flood damage is inevitable in all coastal areas and the only solution, besides reducing emissions, that countries can do to help right now is to utilize risk reduction and risk transfer measures. More importantly, adapting land-use planning and the continuous strengthening of sea defenses are needed for coastal communities to prepare for and potentially prevent coastal damage caused by climate change. If once-in-a-millennium storm surge events strike Northern Europe or the United States every 30 years, as some experts believe will happen by the end of the century, governments and insurers will have a substantial amount of risk to manage. And though insurance is usually a useful way of managing risk, the world cannot insure its way out of climate change. 

"Much of the debate in the U.S. over climate change has focused on the costs of actions to reduce emissions," said Reed. "The findings of this report highlight the enormous costs of doing nothing."
-EH

Revenge of the Former Employee
In January 2008, a disgruntled former employee of Fannie Mae planted malicious script that was designed to overwrite all data on the financial giant's network. Sadly, this type of vengeful act is happening more frequently than ever and executives are taking note. In fact, according to Ernst & Young's 12th annual Global Security Survey, 75% of respondents are concerned with the possibility of reprisal from former employees seeking revenge. But as budgets are being cut, managers are finding it difficult to fund IT security initiatives within their organizations. In fact, 50% of respondents ranked this as a high or significant challenge, a meaningful 17% increase over 2008 numbers. The current state of the economy puts many executives in a difficult position. They feel the need to increase IT security measures, but are restricted because of budget woes. "Information security today already requires a lot more investment, as organizations race to catch up with an accelerating threat landscape, after a much delayed start," said Paul van Kessel of Ernst & Young's information technology risk and assurance services practice. And as layoffs continue, albeit at a slower pace, senior executives will be turning to their IT departments to devise tighter security measures without breaking the bank.
-EH

Inflation a Threat for Reinsurance
Future inflation may affect reinsurers' profitability across all lines of business, according to global professional services firm Towers Perrin. The world's fourth largest reinsurance intermediary recently reported such news, claiming that casualty lines would be hit hardest in an inflation spike. "When it comes to reinsurance contracts, where several years often elapse between rates being set and claims being paid out, inflation is a potential threat and can become a real problem," said Ross Howard, COO for Towers Perrin's reinsurance brokerage business in Europe. "Historically, inflation has caused larger future claims, and, in the current climate, the industry is not likely to be able to factor this into pricing." The report estimates that the impact of an inflation rate of 3% would be that claims costing $1 million today would cost a reinsurer $1.11 million on average. It is important to also note that inflation can have a knock-off effect on frequency-meaning that periods of high inflation generally correspond with a greater number of claims. An inflation high point of 3.4% in 2000 was followed by a loss ratio of 99% on casualty lines in 2002, for example. It remains to be seen if, as a response to rising inflation, reinsurers will reduce their casualty writings, as they are already taking a hard look at their casualty books.  
-EH

Commercial Insurance Market Woes
A recent report by specialist research firm Mactavish claims that insurers and brokers need to seriously rethink the risk assessment process. In the startling report, Mactavish claims that a new wave of the current financial crisis could strike due to perceived failures by management and the insurance industry to address risks effectively. The news comes from Mactavish's Sector Risk Research Program, which reports that "parallels can be drawn between large P/C insurance institutions today lacking the ability to fully understand changing risk exposures and more publicized past failures of financial institutions to understand risks assumed." The report also states that turmoil in the commercial insurance market is expected as a latter phase of the financial crisis. Many of the executives surveyed said insurers must act quickly to identify areas of their portfolios where underwriting is most seriously misaligned, adjust reserves and explain the implications to their stakeholders. "Many commercial insurers have failed to keep pace with the unprecedented changes in commercial risk, and the findings have revealed significant flaws in the way commercial risk is assessed and insurance placed," said Achim Bauer, partner at PricewaterhouseCoopers. Many are keeping an eye on this possible "perfect storm."
-EH

Emily Holbrook is associate editor of Risk Management.