More Rainy Days Ahead

In his recent study, renowned British economist Sir Nicholas Stern demonstrated that climate change not only presents a huge environmental problem, but also an economic one.

Climate-related damage can be costly to businesses -- and to insurance companies. Hurricane Katrina, for example, destroyed homes, oil platforms and factories and ran up a bill of $45 billion (34 billion euros) for the insurance sector.

Peter Höppe researches the impact of climate change for the world's second-largest reinsurance company, Münchener Rück.

Rising number of weather-related claims

"As an insurance company, we are directly affected by climate change since we have to pay more claims each year caused by weather-related natural catastrophes," said Höppe. "Our analyses clearly show that such catastrophes have increased from two to more than seven per year."

The company uses a simulation model to help calculate its rates. Simple meteorological observations are also taken into account -- for example, the fact that tropical cyclones are popping up in unusual places. In 2004, there was one in the South Atlantic and a year later one near Europe.

Climate change not only represents risk, however, but also economic opportunity. While industries are investing in low-emission technology, insurance companies are getting involved in other ways.

Münchener Rück discovered the so-called Clean Development Mechanism, which is a component of the Kyoto Protocol. It makes it possible for industrial countries to invest in sustainable projects in developing countries, thereby improving their own climate "balance sheet."

Reducing risk in environmental investment

But many shy away from the risk associated with the Clean Development Mechanism, and that is where the Munich reinsurance giant steps in. They insure investors that undertake projects to reduce carbon-dioxide emissions in developing countries.

"It's much less expensive than doing it in an industrial country. And it contributes to climate protection as a whole," said Höppe. "Investors only take on these kinds of projects when the risks associated with it are somehow insured."

The number of proposals for emissions-reducing projects in developing countries has risen sharply in recent times, an indication that Münchener Rück has a market to tap.

Micro-insurance for mini claims

The Munich reinsurer has started offering other environment-related products as well. Using micro-loans as a model -- which are meant to boost small-scale business ventures -- they've developed micro-insurance. The concept is simple: very low premiums, and very low payments.

"This enables individuals to stay on their feet, or rebuild. A fisherman can buy a new boat or do urgent repairs on his house," said Höppe.

The problem is, however, that those who need the protection of the insurance can't afford it. That's why industrial countries should step in and take responsibility, according to Höppe.

"It would be more than fair to repair damage in those places where inhabitants can't do anything about climate change," he said.