Changes in the climate have the potential to produce significantchanges in the risk posed by natural hazards around theworld.

As the world economy grows and changes, the risk to businesses,governments and public well-being will be dominated by the combineddynamic effects of changes in hazards, and the increasingly fastevolution of economic vulnerability to extreme events. Thepotential exists for economic risks from natural hazards toincrease to levels where events with devastating and wide economicimpact on countries and companies are no longer rare.

As highlighted in the latest Intergovernmental Panel on ClimateChange (IPCC) report, the current state of knowledge on climatescience, and hence current and future changes solely in thefrequency and severity of natural hazards, continues to develop,but is still largely clouded with uncertainty. In contrast, factorsdriving increases in vulnerability, including the total assetsexposed to these hazards and the consequences of those assets beingimpacted, continue to expand at a steady rate. Interconnectedeconomic growth is increasingly concentrated in coastal urbanareas, which increases the density of economic value in regionsthat are disproportionately exposed to hazards from wind andwater—the two hazards most impacted by changes in the climate.

The general sets of recommendations offered from studies in thelast 10 years by the insurance, reinsurance and broker communitiesare fairly obvious; more research, more effort to limit impact onthe climate, and better models. However, what is really needed isinsight on how to translate the current science into action, and tocollaborate to accelerate the understanding and cost effectivereduction of the evolving risk. In early July, a session under thesame title as this article was hosted by FM Global at theUnderstanding Risk conference in London, England, with thoseobjectives. The following three panelists, comprised of experts onclimate science, public policy and economics, led a topicaldiscussion and engaged in dialogue with a diverse audience:

• Professor Tim Palmer, Royal Society researchprofessor in climate physics, Oxford University, co-director of theOxford Martin Programme on Modelling and Predicting Climate. Palmerhas served as author, lead author or review editor on all five IPCCWorking Group One assessment reports.
• Professor Roger Pielke Jr., professor anddirector of Center for Science and Technology Policy Research atUniversity of Colorado. Pielke is a fellow of the CooperativeInstitute for Research in Environmental Sciences (CIRES) and authorof the books “The Honest Broker” and “The ClimateFix.”
• Mr. Jeremy Oppenheim, director of McKinsey'sGlobal Sustainability and Resource Productivity Practice and leaderof New Climate Economy project. Oppenheim co-authored a majorreport: Resource Revolution: Meeting the World's Needsfor Energy, Food, Water and Materials and is a former senioreconomist from The World Bank.

The discussion was structured around the factual understandingof climate change from current data, our knowledge of the physics,and the ability to translate that knowledge into climate scienceand then to usable assessments of economic risk. Insight from thisgroup of experts, through their prepared remarks and dialogue withthe audience, yielded the following five key points:

Climate science is not a long-term weatherforecast.

The goal of a climate projection is to understand the trendspresent in the changing statistics of weather. These trends aresubject to an evolving bias in the change of the overall climateand hence have to be expressed in probabilistic terms due to thehigh degree of variability in what we observe as weather.

The specific hazards and the timeframe of change areimportant.

Although short-term increases have been predicted in the past,they have proven not to be credible. The disconnect betweenshort-term trends and long-term observations is reflected in thediscrepancies between climate science and the cosmetic treatmentsthat gain media attention. Despite media coverage followingspecific storms attributing them to climate change, U.S. hurricaneshave not increased in frequency or intensity since 1900. Continual,and highly geographically variable, increases in sea level rise,however, are well-established.

Risk is currently driven by economicfactors.

Although losses continue to increase, when adjusted for increasein value, there is no upward trend in loss from these hazards. Thisobservation does not mean changes won't occur in the future, only(as per above) that the trends will evolve over long periods oftime.

The need for energy is an important driving factor ofeconomic growth.

Population growth and urbanization will continue to increasedemand for energy in the most available and cost-effective forms.Energy is the key challenge in terms of efficiency and overallbusiness value stability.

There is a space full of opportunity for improvedeconomic growth and reduced risk.

Sustainable modes of energy efficiency are already making a hugedifference. The right technologies will continue to expand—and witheconomic growth—the potential for investing in more resilient andlower emitting energy sources should improve in step. Investing inthese systems, and making others more resilient, is goodeconomics. Innovation (of all types) that is firmly in thisspace is yet another economic opportunity.

With the world changing faster every year, it's more importantthan ever for insurance professionals to be informed and avoid thetrap of inaction produced by the cloud of uncertainty. By taking afactual view of the economics of climate risk, it becomes moreviable to manage and take proactive steps to reduce risk throughclimate change mitigation from reduced environmental impact and byclimate adaptation through improved resilience. Even in theenvironment where hazards are not increasing, the currentacceptance of risk will lead to unacceptable outcomes in thelong-term. However, when we consider the potential long-termclimate change trends, it becomes increasingly urgent to takeactions that are both good for the economy and good to reducerisk.

The future is not what it used to be, but cost effective measureof resilience can make it even better.

Dr. Louis Gritzo is vice president and manager of researchat FM Global, one of the world's largest commercial propertyinsurers.