TL: CLIMATE CHANGE AND THE REINSURANCE MARKET SO: Jeremy Legget, Greenpeace International (GP) DT: March 9, 1994 Keywords: atmosphere energy climate change business banks / Invited paper for the Journal of Reinsurance, 1994: CLIMATE CHANGE AND THE FUTURE SECURITY OF THE REINSURANCE MARKET: RECENT DEVELOPMENTS AND UPCOMING ISSUES FOR THE INDUSTRY. Jeremy Leggett About the author: Dr Jeremy Leggett is scientific director of Greenpeace International's Climate Campaign. Between 1978 and 1989 he was an earth scientist on the faculty at the Royal School of Mines, Imperial College, where he won two major international awards for his research on the past history of oceans, sat on several advisory committees for the UK government's Natural Environment Research Council, and was a consultant to the oil industry in the UK, Japan, and Pakistan. Abstract: The outcome of ongoing multilateral negotiations under the Framework Convention on Climate Change is of profound significance to the reinsurance industry. Input by the industry to the negotiations stands to speed the pace of greenhouse-gas emission-limitation, thereby decreasing the extent to which climate change will undermine the future security of the reinsurance market. INTRODUCTION Greenhouse-gas emissions from human activities, especially the production and consumption of fossil fuels, threaten to destabilize climate through the process of global warming. This is no longer a controversial statement. A large international body of scientists set up by the UN, the Intergovernmental Panel on Climate Change (IPCC), advised governments in a 1990 report that global warming is "certain" unless greenhouse-gas emissions are cut ("Climate Change: The IPCC Scientific Assessment," Intergovernmental Panel on Climate Change, Report to IPCC from Working Group 1, edited by J. T. Houghton, G. J. Jenkins and J. J. Ephrams, WMO-UNEP, Cambridge University Press, 1990). They reaffirmed that assessment in 1992 in a second report (1992 IPCC Supplement, Scientific Assessment of Climate Change, Final Report, Guangzhou, China, January 1992). The IPCC's scientific working group comprises more than 300 climate scientists, most of them in government service, from more than 40 countries. As a result of the IPCC's warnings, more than 150 governments signed a Framework Convention on Climate Change in June 1992 at the Rio Earth Summit. This treaty has the stated objective of stabilizing greenhouse-gas concentrations in the atmosphere at levels and within a time frame which pose no danger to economies, agriculture and natural ecosystems. A measure of the general concern felt by governments over climate change is that the Climate Convention, one of the most complex international agreements ever negotiated, was completed after less than 18 months of talks. The Convention required 50 ratifications to come into force, and the fiftieth took place in December 1993, just 18 months after the signing ceremony. Though the IPCC's conclusions, which have driven the Convention process, preclude doubt about the inevitability of global warming, the complexity of the Earth's climate system equally precludes certainty over the rate, timing, and magnitude of that warming, particularly at the regional level. Based on computer models of climate, the IPCC gives a "best guess" estimate of a degree Celsius within just a few decades, and almost 3 degrees C by the end of the next century, assuming no significant reduction in emissions. This would represent a rate of warming far faster than any experienced during the history of civilization, and there is no doubt that an increase in the global mean temperature of this magnitude could perturb climate seriously. Recent discoveries using ice cores from the Greenland ice cap show that when the global average temperature was last 2 degrees Celsius warmer, around 100,000 years ago, the climate may have been prone to sudden switches. Regional temperatures were evidently capable of rising and falling by up to seven degrees Celsius within a matter of years, probably in response to changes in behaviour by ocean currents in the North Atlantic (Greenland Ice-core Project (GRIP) Members, "Climate instability during the last interglacial period recorded in the GRIP ice core," Nature, v. 364, p. 203 - 207, 15 July 1993). Imposing such switches on a human civilization which has evolved during 10,000 of relatively stable climate would inevitably result in disaster. Where reinsurance markets are concerned, a destabilized climate poses significant risks to reinsurance capacity, threatens the actuarial basis for catastrophe insurance, and hence threatens the future profitability of the insurance industry as a whole. The IPCC and other scientists have pointed to risks of increased storminess, elevated sea-level, stronger storm surges, increased drought, greater incidence of wildfire, sporadic and catastrophic inundation, and increased occurrence of a number of other categories of catastrophe ("Potential Impacts of Climate Change," Report Prpred for IPCC by Working Group 2, UNEP-WMO, June 1990). Already, leading reinsurers have concluded that human enhancement of the greenhouse effect has been a contributor to the recent bad catastrophe years ("Munich Re plea for catastrophe action," Lloyd's List, 23 April 1993."Catastrophes in a new climate," Lloyd's List, 27 April 1993). The relationship between greenhouse-gas emissions and atmospheric concentrations is such that deep cuts are needed in the former to stabilize the latter: merely putting a cap on emissions at present day levels would cause atmospheric concentrations to go on rising steeply. At the ongoing climate negotiations, the so-called "INC," talks (shorthand for the Intergovernmental Negotiating Committee on the Framework Convention on Climate Change), progress towards the agreed ultimate goal of stabilizing atmospheric greenhouse-gas concentrations at levels which avoid danger has been painfully slow. The commitments section of the Convention as it stands, which infers a commitment by industrialized nations to stabilize emissions at 1990 levels by the year 2000, comes nowhere near the target that would be needed in order to be consistent with the agreed objective of the Convention. The First Conference of the Parties to the Convention, which will be held in Berlin, during March 1995, presents the first opportunity to beef up commitments as a first step towards stabilization of atmospheric concentrations: the Convention indeed requires this to done. Unless the INC negotiations speed up, greenhouse-gas concentrations will ascend ever more steeply, ever further undermining the security of the future insurance market. Yet at the eight sets of INC negotiations held since the first session in February 1991, the insurance industry has not been represented. Meanwhile, a number of other business lobby groups have been consistently represented, and highly influential in the process, both at the INC sessions and in intersessional activities. Groups such as the Global Climate Coalition, a multi- million dollar umbrella group funded by a range of oil, coal, electric utility, and other fossil-fuel related companies, has consistently lobbied governments with the argument that even freezing emissions at present day levels is unnecessary. These groups are lobbying for a cause which is, at best, negligent of insurers' interests. The reinsurance industry's interests badly need representing at forthcoming sessions of the INC negotiations. The next meetings, ahead of the First Conference of Parties, are vital to the question of whether or not emissions commitments will be reviewed. The industry should be conducting bilateral consultations on climate change with governments and agencies such as the OECD. It should be submitting documented proposals to the climate convention Secretariat, and entering into dialogue on climate change with other sectors of the business community. This paper has two objectives. The first is to review the emerging response of the reinsurance industry to the threat posed by climate change. The second is to describe the upcoming events on the INC calender, and how they relate to the interests of the reinsurance market. The reader is referred to earlier Greenpeace International publications for material summarizing the scientific arguments over global warming (J. K. Leggett, ed, "Global warming: the Greenpeace Report," Oxford University Press, 1990) the potential impacts of climate change, (J. K. Leggett, "Climate change and the insurance industry," Greenpeace International Special Publication, February 1992, updated May 1993; "Emerging Impacts of Climate Change?" Greenpeace International Special Report, July 1993), and the economics of policy responses to climate change ("Fossil fuels in a changing climate," Greenpeace International Special Report, April 1993). THE EMERGING RESPONSE OF THE REINSURANCE INDUSTRY When the IPCC's First Scientific Assessment was released in May 1990, it had an immediate impact on governments. For example, the UK's then Premier, Margaret Thatcher, told the press on the morning of its publication that "...we have an authoritative early warning system: an agreed assessment of some three hundred of the world's leading scientists of what is happening to the world's climate ...a report of historic significance... what it predicts will affect our daily lives." On a question that was of immediate importance to insurers, that of how global warming might influence the severity and frequency of windstorms, the IPCC reserved judgement. But in July 1990, the insurance industry was hit by the seventh "billion dollar" windstorm within less than three years, on this occasion in Colorado. For the twenty year period up to October 1987, there had been no natural catastrophes causing more than a billion dollars (in constant 1992 dollars) worth of losses. In October 1987, a run of astonishing bad luck began with a windstorm in NW Europe which cost the industry $2.5 billion. Then came Hurricane Hugo in September 1989, hitting the southeast coast of the US as well as for Caribbean, causing more than $5.8 billion worth of insured losses - the most expensive disaster in US history, up to that time. Four more billion-dollar European windstorms during January and February 1990 together clocked up $10.4 billion. In the wake of the European windstorms of January and February, insurers were pointing with concern, in growing numbers, to the emerging predictions of global warming ("Insurers fear global warming to hike losses," Business Insurance, 12 February 1990). By November of 1990, Swiss Re was sounding the alarm at its most senior levels. General Manager H. R. Kauffman wrote that "there is a significant body of scientific evidence indicating that last year's record insured loss from natural catastrophes was not a random occurrence. Instead it may be the result of climatic changes that will enormously expand the liability of the property-casualty industry. ...in the light of the magnitude of these losses, it would be prudent for the property/casualty industry to act is if that theory (global warming) is correct. Failure to act would leave the industry and its policyholders vulnerable to truly disastrous consequences ...if the rapid increase in worldwide storm damage is due to a trend that has hitherto gone unnoticed, the situation is indeed highly ominous: even a flourishing industry cannot be stretched beyond its limits." Munich Re issued a long report in 1990 analysing the threat. The basis for its concern was clear in the statistics. "With economic and insured losses increasing in volume by a factor of 3 and 5 respectively since the 60s, we definitely have a trend which, without exaggeration, may be regarded as dramatic." The report went on to put considerable flesh on the meaning of a warming world for windstorm activity. For example, "if water temperatures increase by 0.5 to 1xC in the course of the next few decades, we can expect an extension of the hurricane season by several weeks and a considerable increase in the frequency and intensity of hurricanes. ...A warmer atmosphere and warmer seas result in greater exchange of energy and add momentum to the vertical exchange processes so crucial to the development of tropical cyclones, tornadoes, thunderstorms and hailstorms. Accordingly, such natural hazards will increase not only in frequency and intensity but also in duration and size of areas at risk. This applies above all to tropical cyclones, which will penetrate moderate latitudes and thus also affect areas so far not exposed to risk. Hence, risk conditions are not only growing worse in the population centres and industrial regions along the north-east coasts of the USA, Australia and New Zealand or in the whole of Japan already exposed to such hazards in the past, but possibly also along the coasts of Western Europe, which have already been hit from time to time by heavy rainfall following in the wake of hurricanes. Now such parts of Western Europe might even be reached by a full- fledged hurricane. Similarly, the "explosive" development of low pressure systems already observed time and again in the Mediterranean region, with features quite comparable to tropical cyclones, might well result in full-scale hurricanes causing incredible damage in these densely populated regions." The bottom-line of the report was portentous indeed. "For the first time in the history of our planet, mankind is about to change the climate significantly and possibly irreversibly, without having any idea of the consequences that will have." ("Windstorm," Munich Re Special Publication, 1990). In the London market, meanwhile, a 1990 report commissioned by the then Reinsurances Offices Association also noted that the greenhouse effect posed a major threat the reinsurance industry. "Even a cursory glance at some of the basic principles of reinsurance reveals the concern that ought to exist about the greenhouse effect scenario," it concluded. "If ever there was a case for moving the goalposts this is it." (J. C. Doornkamp, "The scientific background to the greenhouse effect and its implications for insurers." Reinsurance Offices Association, Special Publication, 1990). 1990 turned out to be the hottest year since records had begun 140 years before. 1990 was 0.39xC above the 1951_1980 average. "On physical grounds, and in the light of an increasing number of numerical modelling studies," wrote two scientists from the UK Met Office and the University of East Anglia's Climatic Research Unit, "it is becoming increasingly probable that the enhancement of the greenhouse effect, through the input of carbon dioxide and other gases into the atmosphere, is contributing to the recent warming." (D.E. Parker and P.D. Jones, "Global warmth in 1990," Weather v. 46, p. 302_311, 1991). The summer of 1990 saw Europe-wide drought, and severe wildfires in the boreal forest for the third summer running, this time in Siberia and Mongolia. California was enduring its fourth year of drought. Coral bleaching, a stress reaction of corals to waters too warm, was at unprecedented levels in the Caribbean and elsewhere. In March of 1991, a Munich Re Board member argued that the reinsurance industry should "make every effort to slow down the rate of this (climate) change." Klaus Conrad, writing in an industry journal, argued that global warming is "certain to lead to weather anomalies, often with catastrophic effect. Uncertainty over the rate of climatic change could cause problems for the industry." He concluded that "the imminent change in climate may well offer reinsurers interesting market opportunities, but the dangers such a change poses for mankind as a whole make it imperative that reinsurers, as citizens and business people, make every effort to slow down the rate of this change." (K. Conrad, "Warming up for catastrophes," Best's Review, March 1991, p. 33). The catalogue of record climatic misfortune continued to build. In May 1991, the strongest cyclone in a century left 139,000 dead in Bangladesh. The winds were stronger than those of a 1970 cyclone which killed 100,000 people. ("Twin disasters hit Third World," Guardian, 3 May 1991). In June, the worst floods in a century killed over 1,000 people in the Yangtze valley. The floodwaters made 10 million homeless, and covered some 20% of China's croplands. Exceptional rainstorms fell in eastern China throughout June and into July, threatening Shanghai and Nanjing.("Review of summer 1991 in the northern hemisphere," Weather v. 46, p. 353_355, 1991).Chinese scientists blamed the early arrival of floods in the north, among other things, on global warming. (Reuters, 18 July 1991). Tragic though these events were, they did not impact global reinsurance capacity, and in August 1991 the industry had another lucky escape when Hurricane Bob, off New England, narrowly failed to become a multi-billion dolar catastrophe. However, in September, Typhoon Mireille became the eighth billion dollar windstorm in less than four years. No major typhoon had hit Japan for 30 years. Mireille was the sixth strongest in the Japan Meteorological Agency's records, and it damaged 1.6 % of all Japanese households, draining $2.21 billion from the Japanese insurance industry's catastrophe reserve system (leaving just $1.86 at the end of fiscal 91). It caused global insured losses of $4.8 billion. The storm skirted the western edge of the Japanese archipelago, and in that respect - like Hurricane Andrew less than a year later - could easily have been much, much worse. There were two interesting things about the cyclone, meteorologically. While crossing the Philippine Sea, it was forced to move to the northwest round a strong area of high pressure east of Japan, so that it swung to the east, as such windstorms are prone to do in that region, further north than usual. Second, it did not lose strength once it made landfall in SW Japan, and this was probably due to the fact that the eastern China Sea was fully a degree C warmer than it normally was for the time of year. After an exhaustive analysis of the typhoon by his experts, a Vice President of Tokyo Marine and Fire, Shiro Horichi, would tell the International Insurance Society's 1993 seminar that "I understand all too well that data provided by a single typhoon are inconclusive, but I think it is possible to say that the above mentioned meteorological features are closely associated with global warming... More specifically, it is possible that the increased temperature of the sea surface, a result of global warming, facilitates evaporation activities which can supply typhoons with a greater amount of steam. This means that the entire force of the typhoon is augmented, keeping its central pressure lower. Moreover, even when the typhoon moves north, it is not weakened as much as usual because the increased temperature of the seas neighbouring Japan keeps the typhoon strong. The fact that high pressure over the Pacific ocean covers such large areas is also considered to be related to global warming." Horichi would go on to say that "the fact is that in recent years natural disasters whose return period used to be regarded as at least 100 years have transpired every year in various places in the world. It seems difficult to believe that these incidents are merely accidental. It would be sensible to say that, whatever the reason may be, natural disasters are undergoing qualitative changes." (S. Horichi, "Natural disasters and changing environment: can the industry prepare," Paper to the 1993 International Insurance Industry Seminar, Tokyo, 13 July 1993). In October 1991, the ninth billion-dollar natural catastophe materialised. This time, it was not a windstorm, but a bushfire, in the drought-stricken east San Francisco Bay area. The insurance price tag exceeded $1.7 billion, and the economic losses were around twice that. It was the third biggest fire in US history, and hit a type of mixed forest-and-home development, with a high proportion of combustible shrub, which made the fire spread as though in a forest while causing the same damage as though in a city. Swiss Re sent a team of investigators to the site within three days. Their conclusions: "This fire may well prove to be a harbinger of a new type of catastrophe that could reoccur on an even larger scale in the US, Japan, Western Europe or in any other economically advanced industrialised nations. ...The issue at stake is best illustrated with the term coined by the American fire fighters at the occasion of the East Bay hills fire. They called it 'the fire of the future'." Could the drought have had anything to do with the fire? That goes without saying. But could global warming have had anything to do with the drought? The Swiss Re concluded that it might: "We ...cannot entirely rule out the possibility that the East Bay hills fire was at least encouraged by these global rises in temperature, even though there is no concrete indication of this development to date." (Swiss Re, "The fire of the future," Swiss Re special publication 1991). 1991 turned out to be was the third hottest year since records began, despite the cooling effect of the huge quantities of sulphate aerosols injected into the stratosphere by the eruption of Mt Pinatubo in June. The seven hottest years on record had all now been since 1980. In March 1992, the German Bundestag's advisory body on climate change issued a report which showed it needed no further persuasion that the signal of an enhanced greenhouse effect was becoming clear. It's Chair wrote that "our planet is already warming at an increasing rate. The first signs of climate change are already measurable and noticeable. Hence, there is no reason any more to delay urgently required actions." (Enquete Commission "Protecting the Atmopshere" of the German Bundestag, "Climate Change - Threat to Global Development," March 1992). Swiss Re, meanwhile, had assembled an expert panel on climate change. An internal report completed in April 1992 found that it was not likely that uncertainties could be narrowed down in the short term. Meanwhile, however, the stakes remained clear: for example, "the exposure of important concentrations of values such as New York or Tokyo can rise sharply with serious consequences for the industry." (Greenhouse Effect Project Team, "Greenhouse effect scenarios for Swiss Re," Swiss Re internal report, April 1992). In July, a review paper by Munich Re's technical chief, who had already written widely on the subject by this stage, concluded that severe problems for the industry were "inevitable" if global warming etimates are correct. Dr Gerhard Berz, Head of Geoscience Research, said "the present problems will be dramatically aggravated if the greenhouse predictions come true. The increased intensity of all convective processes in the atmosphere will force up the frequency and severity of tropical cyclones, tornadoes, hailstorms, floods and storm surges in many parts of the world with serious consequences for all types of property insurance. ...In areas of high insurance density the loss potential of individual catastrophes can reach a level where the national and international insurance industries run into serious capacity problems." (G. A. Berz, "Greenhouse effects on natural catastrophes and insurance," The Geneva Papers on Risk and Insurance, 17 (No. 64, July 1992), p. 386-392). In August of 1992, wildfires raged across southern Siberia in the worst drought in 100 years. Crops and 10,000 hectares of forest were destroyed by 19,000 fires. ("Forest fires in CIS rage during worst drought in 100 years," IPS, 25 August 1992). The following month, floods devastated Pakistan. At least 2,000 people were killed by the floods and landslides triggered by heavy rains in the Punjab and the Northwest Frontier Provinces. Nearly 3.2 million people were affected in the Punjab, and 1.7 million in the North West Frontier Province. 4.3 million acres (1.7 million hectares) of agricultural land in Punjab were inundated. Total economic losses exceeded $2 billion. ("Floods may force Pakistan to cut development plans," Reuters, 21 September 1992). Again, reinsurers were far from the alone in suffering unprecedented losses. The same month, the tenth billion-dollar natural catastrophe hit Florida. Hurricane Andrew's losses hit a new world record of $16.5 billion. The very next month, with the clean-up operation in Florida barely underway, another windstorm was hurling yachts up American beaches. Hawaii's Cyclone Iniki, with insured losses of $1.6 billion, became the eleventh "billion dollar cat." Meanwhile, the Japanese Maritime Safety Agency reported worrying warming in the Western Pacific. Regular measurements of sea-surface temperatures, across a large tract of the ocean, showed an increase of 0.7 degrees C during the period 1984 to 1992. "Global warming," a JMSA official told the Japanese press, has been proved by the change in the water temperature." (Asahi Shimbun, 16 September 1992). In December 1992, a ferocious freak storm hit New England. Dubbed "The Great Nor'easter of 1992" by insurers, it did not hit the billion dollar bracket, but it flooded the New York Subway, causing it to be closed down for the first time in its history, and was one of the worst storms in living memory, dragging houses into the sea, wreaking havoc along 600 miles of coastline, killing nine people, and causing a state of emergency to be declared in New York, New Jersey, and Connecticut ("Storms increase US catastrophe losses," Lloyds List, 30 December 1992; "Global warming blamed for big New York storm," Independent, 13 December 1992). Even for those insurers able to persuade themselves that this crop of disasters had more to do with random variability than greenhouse warming, the news from the modellers about the future continued to be bad. An Australian climate modelling study at this time suggested that cyclones would become more intense in a warming world. The work, by CSIRO's Division of Atmospheric Research, indicates that allowing atmospheric carbon dioxide concentrations to double would more than double the Yearly Genesis Parameter, a factor used by climatologists to estimate the number of storms per year. ("Warmer World brings more hurricanes," New Scientist, 5 December 1992; and B. Ryan, I. Watterson, and J. Evans, Geophyiscal Research Letters, v.19, p 1831, 1992). Despite the cooling effect of Pinatubo's aerosols, felt throughout the year, 1992 was still the tenth hottest year on record. According to Dr. P. Jones of the Climatic Research Unit of the University of East Anglia, "it is still too early to say for sure that this is due to the build up of greenhouse gases in the atmosphere, but it becomes more likely with each passing year." ("Global temperature rise confirms warming trend, Independent, 22 January 1992). 1992 catastrophe losses reached a record of $27.1 billion, a global record and an increase of 87% on 1991 even allowing for inflation. Over $22 billion of this comprised windstorm losses. Swiss Re found that both the size and frequency of catastrophes seemed to be increasing. (Swiss Re, Sigma 2/93, Naturkatastrophen und Grossschaeden 1992: neuer Rekord der versicherten Schaeden. Reported in Lloyd's List, 27 April 1993). Munich Re, analysing the 1992 record, listed more than 500 natural catastrophes compared to 400 in previous years. The ten year period 1983 to 1992 showed 10 times the insured losses of the 1960s, after adjustment for inflation. (Lloyd's List, 27 April 1993). In January 1993, NASA and NOAA researchers told "Science" magazine that Mt Pinatubo's cooling effect would not last beyond 1993. Jim Hansen of NASA's modelling team had predicted that the shade cast by the volcano's aerosols would cool the planet by about 0.5 degrees Celsius, and by the end of 1992, he was bang on target. Hansen had earlier bet that one of the early years of the 1990s would break all records, and he won his bet after the decade's first year. His third bet is that greenhouse warming will become obvious to all, once the Pinatubo cooling effect subsides. How long will that take? Larry Stowe of the US National Atmospheric and Oceanographic Administration reported that the stratosphere over the tropics was nearly free of aerosols already, and anticipated that Pinatubo's influence will have faded by the end of 1993. (Kerr, R. A., Pinatubo global cooling on target," Science, 29 January 1993). In any event, strange warmth was being felt early in 1993 in the heart of the Russian winter. Russian winter temperatures had been rising for five years, and the January `93 average temperature was fully 4.5 C warmer than normal. The director of the Russian Hydrometeorological Centre, Alexander Vassileyev, said: "it is a trend... I am afraid to say it is because of the so-called greenhouse gases. ...I think this warming will continue." ("Global warming ends the glories of the Russian winter," Guardian, 18 February 1993). European insurers in London and Zurich by this time had told Greenpeace that they feared for the very future of the trillion-dollar insurance industry if the IPCC's forecasts of global warming were correct ("Climate Change and the Insurance Industry," Greenpeace Special Publication, J. K. Leggett, February 1993, and second edition May 1993; "Insurers turn up the heat," The European, 11 February 1993). Such fears were also being expressed in Japan. Toshifumi Kitagawa, Director of the New Fire Insurance Business Department at the Tokyo Marine and Fire Insurance Company, told the Japanese press that "the recent large-scale disasters in Japan and abroad do not seem to be coincidental. It seems that behind these events are global-scale changes in climate patterns." Kitagawa, wrote Asahi Shimbun's correspondent, "has the same sense of crisis as his counterparts abroad," In 1992, the 25 member companies of the Marine and Fire Insurance Association of Japan formed a panel on global warming within their Safety Technology Committee. An unidentified person in the Marine and Fire association's public relations office told Takeuchi that "if more disasters like (Typhoon Mireille) follow, it could affect the industry's very existence." ("Insurance industry concerned about the Earth," Asahi Shimbun, 3 February 1993). In March 1993, the US "Storm of the Century" caused havoc from Cuba to Canada. Total insured losses reached $1.6 billion. (US winter storm damage claims top $1.6 billion," Lloyd's List, 31 March 1993). Meanwhile, the latest climate modelling involved yet more bad news about the future. The world would endure more droughts and more short periods of potentially destructive heavy rain under doubling of CO2, according to the US Goddard Institute of Space Studies and the Australian CSIRO's Division of Atmospheric Research modelling teams' most recent efforts. Despite possible increases of rain in the intense periods, total precipitation may actually decrease.(Climate Alert, Vol 6, No 2, Mar-Apr 1993). Back in the present, bad though the 1992 catastrophe statistics had been, the first quarter of 93 offered beleaguered insurers little respite with a bill of $2.2 billion. ("Best predicts heavy losses for 1993," Lloyd's List, 20 April 1993). In April 1993, Dutch researchers, publishing a statistical analysis of the temperature record, concluded that "the probability that the temperature increase of the the last century (around half a degree Celsius on average) has not been influenced by the greenhouse effect is less than one per cent. In global terms, this assertion does not rule out that the the increase may have occurred spontaneously', but the probabilty is very small. The greenhouse gas explanation is much more plausible." (Richard Tol and Aart de Vos, "Greenhouse statistics - a different look at climate research," Change, 13, 1993). The world's biggest reinsurance company at this stage pleaded for action on climate change. In April 1993, Munich Re's analysis of the 1992 catastrophe statistics called on governments, businesses, and insurers alike to "take immediate action" to address the "dramatic development of natural catastrophes." "The threatened climatic changes demand urgent and drastic measures," the company said. Commenting on the analyses of the two big reinsurers, Lloyd's List wrote: "the convenient theory that the increase in the size of losses is mainly a reflection of higher wealth - and consequently, of insured values - in those countries affected by natural disasters seems to be incorrect. It is far more likely that other causes, such as climatic changes, have already taken over as the main factors pushing losses upwards." ("Munich Re plea for catastrophe action," Lloyd's List, 23 April 1993). The catalogue of catastrophe continued. In July, the US "flood of the century" ravaged large areas of nine midwestern States. Along the Mississippi, all bridges for 500 km were severed. The high waters built and built over weeks until the flooding became a "one in 500 years disaster." The damage bill passed the $10 billion mark, 30,000 people were left temporarily homeless and 41,000 sq km of farmland were indundated. In August, devastating floods hit ten provinces of central and Eastern China. Causing over $2 billion in damage, they wrecked over half a million homes, and killed at least 380 people in the Yangtze and Huaihe river valleys. ("New flood toll," Guardian 12 August 1993). In September, at a seminar organised by the US College of Insurance, Greenpeace USA, and the insurance consultancy firm ET&T, further leading figures in the reinsurance industry spoke out on the subject. Said Frank Nutter, President of the Reinsurance Association of America, "Greenpeace, it seems to me, makes a good case that we have significant and, perhaps, permanent changes in our climate in this country, and in the world. We in the insurance industry, find that our economic interest is in fact very much intertwined with that of the environment and the climate. It is the threat of natural catastrophes that drives the demand for insurance products on property. It's also clear that climate change could bankrupt the industry." Nutter described a process which I have elsewhere referred to as the "climatic domino effect." "We've certainly seen the effect of natural catastrophes on insurance markets that have caused economic activity to come to a screeching halt," he said. "That's true in the United States Virgin Islands in particular, where there are very few new home sales. New construction has come to a halt. A lot of that is a function of lenders that require insurance protection being unwilling to make loans without that insurance protection. The concern is, of course, that the same scenario would play out, as it has, in part, in Hawaii, and in Florida and other coastal areas where the industry is concerned about it's exposure and is seeking to minimize potential loss. If you don't have insurance, there's a lot of things you can't do." Eugene Lecompte, President of the National Committee on Property Insurance, stressed the problems climate change posed for availability. "Despite the fact that the industry is financially healthy, and has some 160 billion in surplus, in two events you could take 70 billion, or maybe 80 billion of that surplus away and you'd cripple the industry. It wouldn't be able to take on new risks. It wouldn't have the capacity to underwrite the business of the future. We'd have massive, massive availability problems." Lecompte closed his presentation at the conference with these words: "Is climate change one of the most important issues facing the insurance industry today? Simply stated, yes." Just prior to the time of writing, in November 1993, Greece is suffering it's worst drought for 100 years. With farmers' gravely threatened, and five million in Athens facing the prospect of no drinking water by the end of the month, the head of the Greek Orthodox Church ordered church-goers to pray for rain. ("Drought threatens farmers' income, IPS, 1 November 1993; "Athens faces acute water shortage as drought persists," AP, 9 November 1993). Is this ongoing litany of climate-related trouble the first sign of emerging climate change, rather than natural variability? The IPCC First Scientific Assessment Report concluded in 1990 that "the unequivocal detection of the enhanced greenhouse effect from observations is not likely for a decade or more." Three years on, as the above account shows, other authoritative groups, and individuals, are beginning to conclude otherwise. This author, certainly, believes that the first signs of climate change are becoming clear, but recognises that believing is not the same as 100% proof. In any event, the more important issue concerns the odds involved in gambling that much worse is not around the corner. Those odds, given the robust broad consensus fashioned the formulating the IPCC's advice to governments on global warming, have to be virtually zero. Meanwhile, waiting for 100% proof is to invoke costly delay, and make the response to the problem all the harder. Mr Shiro Horichi of Tokyo Marine and Fire, in the speech referred to above, articulated a clear view of what all this means for reinsurance and insurance companies. "I believe that a single non-life insurance company or the non-life insurance industry of a single country can no longer solve the problems we face in handling natural disaster risks. After all, dealing with natural disasters is indeed a global issue, as long as it can be assumed that worldwide environmental changes have something to do with natural disasters. ....I would, therefore, like to suggest that through international fora ....the non-life insurance industry worldwide promote opportunities where we can share information such as studies in global warming, natural disasters, and the relationship between the two, thereby upgrading the non-life insurance industry throughout the world." The options, of course, extend to far more than exchange of information. At the top of the list is the imperative of an effective, co-ordinated representation of the industry at the climate talks, and in the ongoing deliberations of the IPCC. The issues involved in such representation are considered in the next section of this paper. Beyond representation in the INC and IPCC processes lies the power that all institutional investors have, through investment decisions, to promote the economic activities which reduce greenhouse-gas emissions, such as renewable and efficient energy technologies. That issue is considered no further in this paper. ISSUES UPCOMING AT THE CLIMATE NEGOTIATIONS Review of the adequacy of emission commitments. The first and most important goal for the reinsurance industry should be to ensure that at the First Conference of Parties of the Framework Convention on Climate Change, scheduled for early 1995, governments strengthen their commitments under the Convention. Without strengthened commitments - whether via rewording of the relevant Article, (no. 4), or via a Protocol to the Convention - atmospheric greenhouse-gas concentrations will rise ever faster. The objective of the Convention, Article 2, requires that commitments made under the Convention and any subsequently- negotiated subordinate instruments, must ultimately lead to the "stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system." This is reinforced with a sentence which requires that this stabilization of concentrations be "achieved within a timeframe sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened, and to enable economic development to proceed in a sustainable manner." Stabilizing atmospheric greenhouse-gas concentrations at levels which ensure that economic activity is not imperilled is clearly in the interests of the reinsurance industry. Governments are in the process of ongoing discussion, in IPCC fora, as to what level of stabilization of concentrations avoids "dangerous anthropogenic interference" with climate, permits sustainable economic activity, allows ecosystems to adapt naturally, and does not threaten food production. Given that senior actors in the reinsurance industry have said that climate change, at worst, threatens the very future of stable insurance markets, the industry should have much to contribute to that discussion. Wherever the "critical threshold" of atmospheric concentrations may be agreed to lie, the existing work of the IPCC, and other prestigious scientific bodies such as the Stockholm Environment Institute, shows clearly that achieving the objective must involve deep cuts in emissions over the decades to come. Currently, the agreed commitments by industrialized countries under Article 4 involve achieving only a cap on emissions, at 1990 levels, by the year 2000 - and even these are implicit, being encapsulated in a form-of-words which was opaquely negotiated, in the final run-in to the Earth Summit, in order to bring the United States aboard the emerging Convention. According to the Stockholm Environment Institute, allowing temperatures to build higher than 2 degrees C above pre- industrial is to run the gauntlet of a threshold beyond which "risks of grave danger to ecosystems, and of non-linear responses, are expected to increase rapidly" (Stockholm Environment Institute, "Responding to Climate Change: Tools for Policy Development," October 1990). So far this century, global average temperatures have already risen 0.3 to 0.6 degrees C above the pre-industrial average. The danger is not limited to absolute temperature increase. Ecologists are equally fearful of the rate of increase in the global average temperature. The IPCC summary of the world's climate models leads to a best-guess estimate of the temperature rise of 1 degree C by 2030 and 3 degrees C before 2100, giving an average rate of temperature increase of 0.3 degrees C per decade. The record of the effects of past relatively-rapid rates of change on ecosystems, particularly at the end of the last ice age, suggest that rates higher than 0.1 degrees C per decade are unsustainable without ecological trauma. The rates predicted by the IPCC would still be an order of magnitude or more faster than anything ecosystems have experienced in the last few million years, at least (B. Huntley, in "Global Warming: the Greenpeace Report," J. K. Leggett (ed), Oxford University Press, 1990). So if we accept the Convention's stated objective at face value, and the Stockholm Environment Institute's work as the best-available science, the time to begin actions aimed at stabilizing atmospheric concentrations of greenhouse gases has clearly long passed, and the Convention's existing commitments fall well short of an adequate starting point. To illustrate the magnitude of the task, in the case of carbon dioxide - the main greenhouse gas derived from human activities - stablizing atmospheric concentrations at present day levels would require cuts in emissions of more than 60%, effective immediately. Clearly this is an impossibility, but the point is that the later we leave stablization of atmospheric concentrations, the deeper the cuts have to be. There is clearly a strong case, therefore, that fulfilling the agreed objective of the Climate Convention requires facing up to challenge, over the next few decades, of bringing about a paradigm shift in the way the world uses energy: essentially, a structured retreat from the fossil-fuel era. At the time the Convention was signed in June 1992, all industrialized countries save the USA were in favout of targets and timetables, either for emissions caps or emissions cuts. Since then, the Clinton Administration has agreed to the same minimum target as the rest of the industrialized world: freezing emissions at 1990 levels by the year 2000. The most progressive of the unilateral targets is that of Germany: 30% cuts in carbon dioxide by the year 2005, as a first step to deeper cuts beyond then. Germany is host to the First Conference of Parties, and will be keen for a successful occasion in Berlin during March 1995. However, there is much work to do, in all sectors, before that is in guaranteed. Adequacy of national plans. Under the convention as agreed, national plans must be submitted by individual governments about six months in advance of the first Conference of Parties. Hence, they are due in September 1994. Each National Plan will detail national greenhouse-gas emissions, and national policies - in-hand and planned - for the limitation of those emissions. The extent to which these National Plans are ambitious enough to stem the emission of greenhouse gases in the years to come will depend on the pressure governments come under as they are preparing their plans during 1994. The reinsurance industry has the opportunity to exert such pressure merely by commenting critically on the capacity or otherwise of national plans, as they are shaped, to meet the necessary national emission commitments. If governments come under pressure from the financial sector in this period (and if they do, it would be for the first time in the entire INC process), then they will be very likely to put more effort into mitigating greenhouse-gas emissions. This in turn will create more impetus to move forward at the first Conference of Parties and beyond. A growing number of studies point the way to economically-beneficial investments in energy efficiency and renewable supply as a route to cutting the consumption of fossil fuels, and in all economic sectors (see summary in "Fossil fuels in a changing climate," Greenpeace International Special Report, April 1993). However, at present many opportunities are being lost. Heading the list of lost opportunities is the delay over energy taxation. In the EC, Germany has led the countries supporting a carbon-energy tax as part of a policy package to allow the EC to meet a collective initial target of stabilization of carbon dioxide emissions at 1990 levels by 2000. At present, 11 of the 12 EC countries supports some form of carbon-energy tax. The UK is still resisting the imposition of such an EC-wide tax, yet it is clear that EC member counties will be unable to meet their commitments without this particular policy tool. Neither is the rationale for UK resistance clear. Quite apart from the incentive provided to save energy, the potential for revenue- raising through energy taxation is huge. For example, the Energy Economist observed in May 1993 that "in 1992, the EC generated about $200 billion in tax on the 10.8 million barrels of oil a day it consumed. This was nearly three times the $73 billion OPEC made in exporting an equivalent amount of oil. In short, the tax is worth more than the commodity it is placed upon." Yet the EC, largely because of the UK's intransigence, cannot agree an additional tax of just $3 per barrel to help limit carbon dioxide emissions. The energy-tax debate heads the list of contentious policy areas pertinent to governments' abilities collectively to meet the objective of the Convention. The reinsurance industry's voice is much needed in that debate. The ongoing work of the IPCC. The IPCC's full Second Assessment Report is due in 1995. An interim assessment is due in September 1994, and its tenor and content will have a major impact on the negotiations. It is strongly in the interest of the reinsurance industry that this report should accurately reflect the current state-of-play in the technical journals, in which important articles on the process of climate change, its impacts, and mitigation, are now appearing almost daily. The industry also has world-class in- house meteorological expertise to call on, for example in the technical divisions of the big reinsurance companies, and this expertise must be brought to bear. Impacts on the financial sector and in particular the insurance industry itself are to be assessed in Working Group II of the IPCC, and this is a new addition to the mandate of the IPCC, relative to the mandate for the 1990 IPCC impacts report. Already, leading insurers have been identified to contribute to that assessment, and this is a useful precedent. Another key debate, in which IPCC working goups 1 and 2 will be active, is the definition of what Article 2 of the Convention, the objective, entails in practice. At what level of greenhouse-gas concentrations does the threat of dangerous anthropogenic interference with climate begin? At what level is the sustainability of economic activity threatened? The IPCC is required to attempt this definition, and the insurance industry surely will have valuable perspectives. The comprehensive- and joint-implementation approaches. Under the terms of the Convention, carbon dioxide reduction credits can arguably be claimed by governments for reductions of greenhouse gases other than carbon dioxide and CFCs (i.e. for methane, nitrous oxide, HCFCs, and HFCs). This is a version of the "comprehensive approach" advocated throughout the negotiations in 1991 and 1992 by the USA. The approach proved contentious with many countries because, under the understood interpretation of the USA, the term "comprehensive" would give equal weighting to the carbon dioxide emissions of American gas- guzzlers and the methane emissions of subsistence rice farmers. Clearly, though, if the taxing goal of stabilizing atmospheric concentrations is ever to be reached, all greenhouse gases must be given priority; governments - especially in industrialized countries - must have programmes which attack the full variety of species of emission, not pick and choose between them. Another pitfall of the comprehensive approach, in its "a- la- carte" (as opposed to truly comprehensive) interpretation, is that carbon dioxide reduction credits can also be obtained for carbon dioxide absorption by "sinks." This gives governments immense scope for creative accountancy, because scientific knowledge is inadequate to calculate how much carbon dioxide is absorbed by forests and marine phytoplankton (the two main sinks) globally, much less in different regions of the continents and oceans. Credits can be obtained in yet another way under the Convention, for reductions of carbon dioxide under "joint implementation" arrangements. This idea the Norwegian delegation championed during the negotiations. The idea is that countries which perceive themselves as having high marginal costs of abatement would be able to fund reductions at lower cost in more carbon-intensive countries. But the point, again, is one of being truly comprehensive. Given the manifest emergency that the human community faces in responding to the global-warming threat, developed countries should be both reducing their own emissions while helping developing countries reduce theirs. The net emissions and joint implementation concepts are arguably examples of special pleading, which substantially weaken action on carbon dioxide emission-limitation. The human community has so far to go in achieving the deep cuts in global emissions needed to stabilize concentrations. And yet governments have agreed what are essentially potential "get-out clauses" even at this early stage. This, too, is a debate which the reinsurance industry might wish to take part in as the ongoing discussions over rules-of-the-road, and implementation, take shape in the run up to the First Conference of Parties. CONCLUSION The awakening of the reinsurance industry to the threat posed to its future interests by human-enhancement of the greenhouse effect has been steady, and accelerating, during recent years. In parallel, a suspiciously thick catalogue of extreme climatic and climate-related events has built up over the same period. The awakening of the industry seems sure to lead imminently, and for the first time, to the involvement of representatives of the financial sector in the ongoing climate negotiations. In and around that forum, the industry will encounter a number of policy debates germane to the question of whether or not it is likely to face, in the intermediate- to long-term future, a stable marketplace in which to operate. Four of those debates have been highlighted here. There are numerous others, including the questions of technology transfer, and the multilateral funding mechanism for the Convention. Environmentalists tend to criticize the Framework Convention on Climate Change for being a treaty without teeth. That, at face value, is true, as things stand. But equally, the Convention has strengths. It has established a tough ultimate objective. It is a truly international vehicle, as befits a truly global problem, and 167 nations have already signed it. It It has established a process for moving forward, quickly if necessary, with meaningful international efforts to arrest the build up of greenhouse gases in the atmosphere. If the reinsurance industry is to give itself the chance of a viable marketplace in the years to come, that process has to be made to work.