As hurricane season starts, F&C warns of the climate impacts on the insurance sector

Boston, MA///May 31, 2006///In anticipation of the 2006 hurricane season, which officially begins tomorrow (1 June), leading investor F&C Asset Management has turned its attention to climate change and its implications for the world’s leading insurance companies.

F&C points out that while general insurers have been the most obviously affected by the severe weather events of the last few years, both property/casualty and life companies face significant risks to their business model. Accordingly F&C has identified seven key trends (see Appendix 1) that it believes pose a challenge to the insurance sector as a whole, whether through the prospect of higher and less predictable payouts, or downward pressure on asset management returns over the long term.

F&C actions to date

As a result of these concerns the company has written to 29 leading insurance companies (12 in Europe, 16 in North America and 1 in Japan) to enquire about their strategy for addressing the implications of climate change for their business. The letter asks companies: How might underwriting be adjusted to reflect increases in climate-related risk? How is climate-risk exposure evaluated in equity investments? Do companies offer any products that might incentivise reductions in emissions? What public policy changes could be made that would allow insurance pricing accurately to reflect underlying climate-related risk?

F&C believes that insurance pricing must accurately reflect the underlying risk posed by the changing climate.

Concerns in the US market

In the US context, F&C has concerns about the ability of the market to respond effectively to changing risk levels because insurance provision and pricing are regulated at state level by Commissioners, and as a result, government policies often interfere with the efficient functioning of the market. F&C argues that this must be corrected to enable the industry to do its job, and businesses and consumers to make long-term decisions that reflect the true costs of the risks they are incurring.

F&C believes that the US Federal government needs to take three steps. First, it should drive a transition to a low-carbon economy through the provision of significant incentives for the take-up of low-carbon technologies. Second, it should promote the free and efficient functioning of insurance markets, so that the true cost of climate-related risk is integrated into risk-pricing models. Thirdly, it should establish regulatory standards that encourage insurance customers to adapt to and mitigate the impacts of climate change.

Alain Grisay, Chief Executive Officer of F&C said: “At the end of the day, insurers are the first ones to pick up the tab. If anyone had any doubts in the past about whether climate change was real, the rapidly escalating costs of the past few years have dispelled them. The rising frequency, severity, and most worrying of all, unpredictability of extreme weather events mean that the past is no longer an accurate predictor of the future. This poses a direct and obvious challenge to the insurance sector.”

Grisay added: “But as asset managers, we are affected twice: first through our direct exposure to the insurance sector, which is suffering greater volatility as a result of extreme weather events. And second, through our long-term obligation to ensure that our customers’ assets are shielded from the sharper, more frequent financial shocks caused by extreme weather events, as well as the subtle decline that the shifting climate will produce in certain sectors and parts of the globe.”

Grisay concluded: “Asset managers play a critical role in directing capital to the promising technologies that hold the key to our low-carbon future. There is no shortage of know-how or capital out there, but the risk-reward balance is not right. We can help, but will only be in a position to deliver the scale that is needed to overcome this challenge if the public policy environment enables and encourages such investment.”

CONTACT:

Sergei Cristo
Communications Manager
F&C Asset Management
+44 (0) 20 7506 1402
+44 (0) 7974 680 924

Karolina Adamkiewicz
Communications Manager
F&C Asset Management
+44 (0) 20 7770 5011

Appendix 1

1. Extreme weather events have become more frequent and more severe.
2. Over the years, they have struck more heavily built-up areas, meaning that economic losses have increased dramatically.
3. Extreme weather events, such as droughts and floods, have long affected developing regions with low levels of life and health coverage. More severe events are increasingly affecting developed areas, thereby threatening further economic losses to the sector.
4. Gradual changes in weather patterns have also resulted in economic impacts that are less visible, but potentially very severe – including long-term damage to soil, marine and forest eco-systems. These, in turn, threaten vital economic activities, including agriculture, shipping, power generation, fisheries, and many water-intensive sectors.
5. The insured share of total economic losses has risen sharply. This directly affects general insurers.
6. The uninsured share of economic losses is absorbed by the wider economy, and is reflected in the impaired investment returns of both life and general insurers.
7. Overall, the past may no longer be an accurate predictor of the future, thereby impairing the sector’s ability to model risks and set prices appropriately.

References:

• Paul R. Epstein, M.D., M.P.H., Associate Director, Center for Health and the Global Environment, Harvard Medical School, said: “Climate change has direct human health consequences: e.g. from heat waves, the spread of malaria and water-borne diseases, and from CO2-enhanced plant pollen production, associated with the quadrupling of asthma since 1980. Climate instability is also favouring the spread of pests and diseases among wildlife, livestock, crops, forests and marine life. Thus, climate change challenges the viability of Life & Health and Property & Casualty insurance, and threatens the very health and integrity of assets, infrastructure and life-support systems upon which we all depend.” Contact: paul_epstein@hms.harvard.edu or +1 617 384 8586 http://chge.med.harvard.edu
• Association of British Insurers: Recent research showed that the worldwide costs of major storms is likely to increase by as much as two-thirds taking the total cost in an average year to £15 billion ($27 billion). The ABI's report, Financial Risks of Climate Change, demonstrates that these costs can be reduced if governments take action now to reduce carbon emissions and promote adaptation such as improved flood defences and enhanced building codes. www.abi.org.uk/climatechange
• Munich Re: Overall losses from hurricanes in the North Atlantic increased dramatically over the last few years, from USD 24 billion between 1999 and 2003 to USD 63 billion in 2004 and USD 165 billion last year (Source: “Hurricanes – more intense, more frequent, more expensive”, Munich Re report, 2006. The four major hurricane loss events in Florida in 2004, were followed by the most active cyclone season since track data were first recorded in 1933. Three of the ten strongest hurricanes ever recorded in the North Atlantic occurred in 2005 (Source: “Hurricanes – more intense, more frequent, more expensive”, Munich Re report, 2006 (www.munichre.com ).
• Risk Management Solutions: Annualized insurance losses from US hurricanes are forecast to be 40% higher as a result of the recent increase in the frequency and severity of hurricanes in the Atlantic and Gulf of Mexico. Please refer to www.rms.com/NewsPress/PR_052206_USHU6.asp
• AIG: In May, AIG, the US’s largest insurance company ($158 billion in market cap) became the first US company to publish a policy for incorporating climate change into its overall business practices. The company will continue to incorporate climate-related risk into its underwriting practices and extend this commitment to its equity investment analysis. AIG will also develop new products that allow the company to help its customers respond to climate change. Leading European reinsurers, such as Munich Re and Swiss Re, have long been researching how climate change will increase the frequency and intensity of natural catastrophes and associated economic losses. Contact: Chris Winans, VP Media Relations, 212 770-7083, chris.winans@aig.com

Notes to Editors:

• F&C Asset Management plc (F&C) was created on 11 October 2004 from the merger of F&C (Group Holdings) Limited and ISIS Asset Management plc.
• Shares in F&C are listed on the London Stock Exchange under the code FCAM. Friends Provident, the FTSE 100 insurance group, is F&C’s majority shareholder.
• F&C is a pan-European business managing £112 billion (as at 31 March 2006) for a diverse range of institutional, insurance and retail clients. F&C has offices in seven countries: France, Germany, Ireland, Netherlands, Portugal, UK and United States.
• F&C is one of the largest UK fund manager by assets under management, has major market share in the Netherlands and is a leading provider of fund services to the Portuguese and German retail markets.
• F&C has a major presence in the UK retail market with strength in corporate bonds, UK and European equities, US smaller companies, multi-manager and ethical funds.
• F&C is a leading force in the UK investment trust industry. The flagship Foreign & Colonial Investment Trust was the first such trust, launched in 1868.
• F&C is the leading European socially responsible investor through its reo® (responsible engagement overlay) service and the Stewardship suite of ethically screened funds, the oldest retail ethical funds in the UK.
• F&C, though its partnership with ISIS Equity Partners LLP, is a leading distributor of Venture Capital Trusts under the Baronsmead brand.
• F&C is a top five manager of UK commercial property.

Registered in Scotland, Company Registration No. 73508 Registered Office: 80 George Street, Edinburgh EH2 3BU F&C Asset Management plc is Authorised and regulated by the Financial Services Authority (FSA).