As the East Coast begins its recovery from Hurricane Sandy's devastation, speculation has emerged as to the role climate change may have played in the storm's ferocity. The debate will rage on, but the reinsurance industry has been sounding the alarm on this topic for years. Reinsurance companies' active leadership in this area could reshape the risk-management landscape for multiple economic sectors.
Anthropogenic climate change
On Oct. 17, German reinsurance company Munich Re released a report titled "Severe Weather in North America," in which it linked the risks of severe weather events to human-caused, or anthropogenic, climate change. The report's prescience seemed morbidly highlighted when Hurricane Sandy slammed into the East Coast not even two weeks later, shredding its way through densely populated areas and leaving large swaths of devastation in its wake.
Munich Re is the world's largest reinsurer when it comes to extreme damage payments, and North America is its most important market. It would be hard to posit a far-left liberal agenda in the company's pronouncements. Its goal is simply to make money, and it does so by mitigating risk. If Munich Re sees risk in climate change, I find that noteworthy. Consider this quote from the company's report:
"In the long term, anthropogenic climate change is believed to be a signiﬁcant loss driver. [...] It particularly affects formation of heatwaves, droughts, thunderstorms and -- in the long run -- tropical cyclone intensity."
Munich Re is not alone in its position. Insurer and asset manager Allianz (NASDAQOTH: AZSEY.PK) actively lobbies for worldwide, binding carbon emission targets and has designed various products around climate change risk, such as catastrophe bonds and micro-insurance. Global reinsurer Swiss Re (NASDAQOTH: SSREY.PK) convened its fourth annual Climate Week NYC conference -- at which it pushes for action on climate change -- barely one month before Hurricane Sandy struck and has a "risk transfer for adaptation" product line that is explicitly geared toward climate-change risks.
American insurers have been behind the curve, but they're catching on. Travelers (NYSE:TRV) redesigned its approach to climate change risk after the severe 2004 and 2005 Atlantic hurricane seasons. The company is now reassessing its coastal underwriting strategy, updating its catastrophe modeling, offering risk control services, and redesigning pricing. The insurance industry in general has become the first major business sector to acknowledge the effects of climate change and seek to deal with the risk in a systematic fashion.
These changes create risks and opportunities for businesses in other sectors. Companies will be affected if they carry insurance policies or if they provide products or services that can help mitigate the deleterious impact of climate change. So, basically, all companies are exposed.
Climate change adaptation
Some companies are pivoting well to deal with this new reality. Starbucks (NASDAQ:SBUX) is aware of the changing growing conditions many of its coffee farmers face and has identified climate change as the primary culprit. The company has partnered with Conservation International to help coffee farmers in Mexico to adapt. Starbucks is also working with academics to develop vulnerability assessments that model the effects of various climate scenarios on coffee cultivation. Starbucks hopes it can protect its coffee supply through these initiatives.
Todd Brady, Intel's (NASDAQ:INTC) director of Global Environmental Services in its Technology Manufacturing Group, told me recently that the company had identified water as a strategic asset and thus seeks aggressively to protect its ongoing supply. Climate change threatens water supply, especially in certain regions. Intel has combined gaming and scientific research in Water Wars, a 3-D gaming platform that studies how people respond to water shortages. Intel uses this to model scenarios and solutions related to climate change, and to promote its devices and applications that address climate change-related problems.
Some companies are even finding profit opportunities in the climate-change threat. Cemex (NYSE: CX), a leading cement producer, is exploring new markets for low-cost, climate-resilient housing for underserved populations. Its pilot project is in Mexico, and Cemex will expand to other markets if the pilot is successful.
Can't read the writing on the wall
Other companies have suffered the consequences of climate change. The World Resources Institute neatly summarizes Anheuser-Busch InBev's (NYSE: BUD) experience following the 2001 Pacific Northwest drought.
Beer is 90% water. Less intuitive is the fact that water is used to produce barley and to supply the electricity needed to produce aluminum cans. Because irrigation was curtailed in Idaho, barley became scarce and more expensive. At the same time the cost of manufacturing aluminum for cans rose because less water meant less cheap hydroelectric energy. The result: a perfect storm of intersecting forces in the beer supply chain.
And then there's Berkshire Hathaway (NYSE:BRK.B). You'd think that as a huge insurer itself, the largest shareholder of Munich Re, and a major shareholder of Swiss Re, the company would be all over this issue. Its property and casualty insurance operations could be threatened if climate change does increase risks and the company's pricing and models are not prepared. Yet at the company's 2011 shareholder meeting, Warren Buffett announced that "climate change is not a material risk to Berkshire." Warren Buffett is 79,863 times as smart as I am, but he may be missing the boat here.
Climate change and your bottom line
I'm not a climate scientist, and I'm not here to settle this. I'm an investor, and I note two things. First, it appears that extreme weather events are on the rise, whatever the cause may be. Second, insurers are changing the landscape out there for companies across the economic landscape on the basis of their confidence that climate change is a risk worth mitigating. As Ben Berkowitz, an insurance industry reporter for Reuters, said in a recent interview on NPR:
"Insurers are absolutely taking a fresh look at how they structure and how they price policies, particularly the ones that really embraced the climate change theories. They fully believe that something is changing and that they have to, for the sake of their business models, look at how they price and allocate risk differently."
I'm doing the same with my portfolio.