 We have been thinking and worrying about climate change at Lloyd's basically since I joined, I was given the task of thinking about the impacts of climate change on the Lloyd's market and the insurance industry in general and started off by convening a report called adapting to a bust where we asked scientists to help us think through many impacts so through effective policies that we write sy'n gwazio eich dyfodol yn arweinyddol i gael gweithio. Felly, rydyn ni'n fath i'r pryd yn gweithio i'r proffwyr ond rydyn ni'n byth yma, sy'n cymryd i'r fath i'r rydyn ni'n fath i'r fath i'r pryd wedi'i gael eich ysgol. Yn ystod, rwy'n gweithi'n gweithio i ddewis i gael, rydyn ni'n ddweud y maen nhw i'n gweithio i'r cwylio, addwn ni'n ddweud yn gwneudIN, y daen chi'n gwneud, a'r cynnwys yng ngynghori panddol yn cael ei wneud? Yn wneud y gweithio, ac how is this going to change, how is this going to get up, how is it going to be worse? So, basically here we have the Lloyd's Building, which has sometimes been described as a factory for insurance. I actually like the building, it is, if any of you have been to London, it is an interesting design, but it is not liked by everyone. I think it is not overly keen on it. Masylio cyfnodol yw'r rhywun yng nglynodau yn y rymwr, яw y ddechrau, i'n hynny ein busnes yr Llywodol neu ymdweithio'r llyfriddol a'r cyflwyno gyda'r Llywodol yn yr unrhyw sy'n hynny ym 15% yma ben dim ddweud yn cynnig, ac nidam iawn i sut nesaf o'r Llywodol yn siarad. Mae Llywodol yn siarad i'r Llywodol sy'n hiad. Mae Pryddoedd yn cael ei wneud, mwy o ches arno, mor hanesaf. that comes from members and there's a whole type of members as individual names. That's what's basically in a nutshell, it's quite a complicated unusual place. The key point is it's not a company, it's a marketplace for insurance. What I want to explain here is, before everyone's familiar with a balance sheet, an insurance balance sheet is no different to any others, and then here it is nicely in balance. Mae'n gweld â'r anodol. Mae'r anodol yn gyflawni'n gweithio gerwain ar gyfer y gwaith ar gyfer gweithio, ac mae'n cael ei gwaith yn cyflawni'n gweithio sy'n ddysgu'r anodol, bod y cwmddorol yn ei gweithio sydd yn gweithio'r anodol. Mae'r anodol yn gweithio, ond mae'n gweithio. Yn ymgyrch yn gwneud o'r cyfarfod, mae'n gweithio'r anodol yn gweithio'r anodol i gweithio'r anodol. That is the assets, the claims are going to get affected by climate change. On the other side of the ballot sheet you got the liabilities there in two forms. One is premium reserves, which is the money that we hold for things that haven't happened yet. We are taking premiums for motor, household, etc. Until the accident happened we can't release that money. So we hold those reserves in the future. Ond roeddwn ni wedi cael ei gael ei gael, ac rydych chi'n ei ddweud. Ond ydych chi'n gael ei ddweud, ac roeddwn ni yn gwneud nw, ond yn ôl ond, ac yn gwneud hynny'n gyntaf. A byddwn ni'n gallu arbennig. Mae'n gael cael ei ddweud, dwi'n gael ei ddweud. Ond rydyn ni'n ddweud, ac mae'r ffordd o'r ffordd Ion yn y canfodol. Yn hynny'n gwybod i ni. Mae'r ffordd i ni'n gwybod i ni, fel ydych chi'n gwneud ond y prif. As you know, we sell a policy that we will pay you if bad things happen and you need to know that we're going to be there and the capital has calculated these days using models so we will simulate our profit and loss account over and over again hundreds of thousands of times When we do that, we will use things like catastrophe models to simulate hurricanes, earthquakes, floods etc. and also simulate other lines of business like aviation, rain etc. We'll simulate the assets, we'll do things like market shocks and all of that gets pushed together into a profit and loss number. Most of the time we make a profit which is good but then there's this long tail of losses and we have to be able to survive the 1 in 200 loss. So that's the test, that's the new Solfty 2 test that's coming in but it's also been in the UK since 2004 so we have had to survive an event on our balance sheet that would be with half a percent probability in a year. So that's how we capitalise and that's important because climate change will affect all those areas. So I'm just going to run through now the different types of policies that we sell and the different ways that climate change will affect them. So starting with the sort of in a sense the obvious thing which is the property damage. So we use catastrophe modelling and the team that I run that's one of the areas that it looks into. So we will have our simulated properties on the ground and we will simulate hurricanes that will hit them or floods and we will say given the wind speed at that location how much does that property get damaged and that will be all fed together with all the other properties to give us a sense of the expected loss and the probable losses in the year. So we asked the well-known catastrophe modelling firm so we had to look at RMS, JVA, AIR to tell us where the climate change is affecting their models. Is it having an effect yet on their models? I am sort of a mixed response which is interesting and they all looked at different areas. So some of them looked at European storms, some of them looked at hurricanes in the US, we had flooding and so on and so forth. So you wouldn't expect a sort of uniform effect. They all said which I was pleased because it's the first time as far as I'm aware this has ever been said for cat modelling firms that any trends in the data that we have seen to date will be coming through in the models by default. They tune their models using the data and as you get an increasing frequency or increasing severity so it will be through into the models. So definitely anything that we've been seeing to date will be coming through in that sort of slow data series but not explicitly. And I'm coming on to talk about hurricane except for hurricane which is being done explicitly. Then RMS in their study, and this is on Roy's.com study if anyone's interested, they said they were looking at the impact of sea level rise off the coast of Manhattan and they said that just the 20 centimetres of sea level rise that has happened since the 1950s led to a 30% increase in the surge losses. So a very large effect from a small amount of sea level rise and we can definitely say that a large chunk of that sea level rise is due to climate change, due to thermal expansion of the oceans, due to meltwaters, et cetera. So there's no doubt then that there's been an effect of insurance loss effect due to climate change. JVA looked at flooding and said over the last half century an increasing proportion of the UK's weather rain has fallen during intense wet spells. So they're starting to see and then that means it is coming through with the data so it's affecting the UK flood. The hurricane, and I'm going to talk about this on the next slide, very definite signal according to GMLs, who's a statistician in the US from a company called Climate Times. So what he's done is a very complicated form of regression which is called a quantile regression, which is where you actually regressed at sort of 25 medium, actually that's probably 25, 75, 90 and 95 or something. But you've regressed at the quantiles and it says every single quantile is showing an increasing trend. So you've got the wind speed going up and that means economic damages go up. As the wind speed goes up the damage goes up. It's sort of obvious actually because you know cap fires do more damage than cap falls, but when you see it as explicitly in the data like this you can start to build up a sort of reductionist scientific argument for the impact of climate change on hurricane losses. Then they've looked at the impact of sea surface temperature on the limiting intensity. So this says as the temperature of the sea surface goes up, so the storms are actually getting stronger. And this is not a physical model which would show that you'd expect that this is a statistical model saying it's definitely happening. So you put those two pieces together, climate change makes the sea surface temperature go up, sea surface temperature makes the storms more powerful, more powerful storms, more insurance losses. So there's a very strong link between climate change and insurance losses from hurricanes. So that's an interesting one and I do think this work is very much worth looking at. So in terms of flooding you've got saturated ground, you've got 4% more moisture in the atmosphere. Every degree centigrade of extra heat allows more water to be held up in the atmosphere. That leads to stronger downpours. It also may lead to changed winter storm tracks. So this is an interesting one. I was talking to risk management solutions last week. That was one of the cap modelling firms. And they were saying to me that the 2013-14 winter, I believe you had some big effects in Ireland actually on the coast. You had some very large coastal effects. And this was a very active, very powerful winter storm. It just didn't happen to hit mainland Europe very much. It's unclear whether that's part of the effect of climate change. It might actually mean that they're steering and missing and maybe that's a good thing. But it might also just be an anomaly in which case what we have is some very large powerful storms that are going to come and get us at some point. And then storm surges, I've talked about higher sea levels and also stronger winds. Then there's subsidence. A very interesting paper by Swissry there where they're actually saying in some parts of Europe subsidence claims are now the costliest natural hazard, which is kind of a surprise me, I have to say. This is obviously where the clay soil typically dries out in the summer and then it causes the land to shrink and then the foundations are undermined and it can cause cracking. And then heave, which is exactly the opposite in winter where they fill up again and they sort of swell up like a sponge and it breaks it in the other direction and it's constantly going up and down. So that was an interesting thing. So obviously we write these property policies. Wildfire is another example, not so big on the insurance costs compared to things like hurricanes. But you can see there that US insured losses over two side-by-side decades went up by quite a factor at 3.9 billion in one decade, 1.7 billion in the previous decade. So there are more wildfires happening partly due to human factors. We've looked into this land management schemes, that sort of thing. But there is a definite signal in there from the mid-80s onwards possibly linked to drier climate, more droughts and also more lightning because climate change leads to more lightning. So we write property policies, but I guess the key thing to remind everyone of is that those policies are typically one year at a time. So we might do construction, which might last for say six, seven years, but apart from that most of our policies are one year at a time. So we can adapt ourselves as an industry to those increasing trends. If the risk goes up then the claims will go up. Obviously the premiums would probably need to adjust and the capital held need to go up as well. So on the property damage side whilst we are seeing some impacts it may not be something we can handle as an industry but we have to be careful and we have to describe what the reputational impacts are because we have to balance the books. Our premium has to be enough to cover the risk and if the risk goes up then it's not us making more profits we just have to cover the risk with those premiums. Liability is a very interesting area. So we have done a number of reports in the past. This one, Litagin and Business Transatlantic Trends looks at the US sort of compensation culture and how it's been exported over the years around the world and starts asking whether this coupled with climate change will have an impact. So a very interesting paper from the Geneva Association which is a think tank. I don't know if you've heard of them but they're based in Geneva. And they kind of are on the board are all the CEOs of major insurance companies around Europe. I think it's worldwide actually. They came out with a very interesting paper which I thought was quite significant that a body like that would come out with something like this and they said the innovative application of liability theories and the inevitable carbon footprint of all industries threatened insurers with the exposure to liability claims that will be pervasive and difficult to avoid. Through traditional exclusionary clauses. So we have exclusions on our policies that says pollution is not covered. What we call slow pollution. So we will do sudden and accidental, an oil rig gets tipped over and its fuel is spilled over the ocean. If it's covered we will pay. But slow pollution where it's a natural maybe a toxic chemical tank that's dripping into the ground we've learnt our lesson there. We pay lots of money in the 80s in the US and that is not covered. And the question is climate change should be considered a slow pollution we would argue for. They're saying well traditional exclusionary clauses may struggle to keep the tide of liability at bay. This is unclear. So sort of obvious here we sell different policies. We sell general liability policies where ordinary people blame things and things and sue them and we'll pay out on most basis. So there was the Kerma versus Murphy Oil case earlier this century where they argued that this particular oil company's activities led to the potential for Hurricane Katrina and they were trying to argue that Katrina was stronger because of climate change and therefore part of the damages they suffered should be paid by Murphy Oil. At the time defended successfully by Murphy Oil so it didn't lead to a claim. Directors and officers is another one where the shareholders might blame the managers if they acted in a way that was deemed to be negligent. And the question is of course negligence is decided after the fact when society's attitudes might be different in the future than they are today. Professional indemnity we provide cover for and this would be where people blame their advisers. So architects, architets, city planners you should have thought about this, we knew about climate change why was the building not built stronger better and it was your fault that's the argument of course there'll be some potential for paying out and claims there. So far cases have been defended and as I mentioned we would hope to think that they're excluded but we're looking at that very carefully. And then another area is political risks. We provide contracts for political violence and political risk. So things like seizure of property where there's a regime change and the government decide that they own all those assets now then that would be covered. Contract frustration again where you can't complete on the terms of your contract because there's an embargo on the country terrorism war on land. So lots of covers are provided against the risk of political shocks. So we would argue that climate change is leading to an increase in tensions globally due to water disputes, energy shortages and migrations and lots of land. So we've done several reports we've done a report on water and we've also done a report on climate change and security. There it was very interesting to me sort of obvious but the population's actually gone up by a factor of three in the last 60 years which is a huge growth in population globally and how have we managed to achieve this as a human race and it's because of the green revolution's evolution. So higher yielding strains of crops that are saline resistant and sometimes disease resistant much greater increase in the use of fertilisers and a 300% increase in the use of irrigation. I don't know if you can see there but as it says the irrigated land is only 15% of the area of the land but it's actually 40% of the world's food comes from irrigation. It turns out that a lot of that irrigation is from fossil water which is water that is in aquifers that don't refill so they were sealed off tens of thousands of years ago and they are being drilled and the water is extracted and used for irrigation but once it's gone it's gone. So that's a risk I think in terms of the kind of carrying capacity of the environment. And also fertilizer production uses natural gas so there's a sort of a fossil fuel dependency here as well. If you look at food price indices they were pretty steady for quite a couple of decades and then there was 2008 and 2010 very large jumps up in food prices. 10 was caused by the Russian heat wave which has been linked to a blocking pattern and climate change and it led some people argue to the Arab Spring because Egypt and other countries were trying to keep the price of bread down and affordable for the populations but the price rises were just so large they couldn't control it. Now this is not a certain fact of course but some academics are arguing that they are linked and we are looking at food security now as part of our work. So climate change, general consensus, the impact on food production will be negative impacting on all areas of food security and we've done another thing I just want to throw this in of how connected all this is because we're always looking out for the next asbestos. Asbestos hits our industry very hard in the 80s. Synthetic biology is genetic modification on steroids basically and it's where you can use computers to design DNA and actually create it in the lab and then insert it into things. There's sort of a strong desire to use synthetic biology to make seeds more heat, drought, disease tolerant which is good and that's progress but of course our concern would be how robust will these new seeds be that nature has a habit of evolving into very robust, tolerant situation and if you use untested, untried things how risky will that be and might we end up with some liability coming over that as well. So we're looking at that we're looking at bread basket failure as a scenario at Lloyd's and thinking through how will that ripple through the economy and how will it affect political risk all the world. Another point about water is if people might start to use it as a strategic weapon and in our report we were saying that building a dam could start being seen as an act of aggression and there's some key risks in various river basins Nile, Tigris, Indus, Mekong but just looking at the Nile for example if you look at what the Egypt could support without the Nile there might be about 6 million people but their actual population is 80 million and upstream of them Ethiopia in 1950 had a population of 18 million now we're up to 80 million and is projected to 2050 as up to 180 million people so rapid population growth there and of course that means that they want to take the water at the source of the Nile and presumably deplete its downstream potential so that's a potential conflict the sort of thing that we're looking at here we know about population and the thing I would like to get across here is everyone talks about 9 billion by 2050 but we don't know that it could be 7.4 according to this study it could be 10.6 so I think there's a lot of things that are taken as just oh that's the answer, it'll be 9 well it might not be 9, it might be 10.6 in which case the risks will be magnified and even worse so we are keenly aware of uncertainties in all these projections and then there's this idea of megatrend refugees which I won't go into detail I think it's fairly obvious people moving across borders and increasing those tensions so on marine risks we write a lot of shipping insurance around the world and how would climate change affect that I mean the ships are supposed to go on the water there'll be more water but that'll be okay for them so how can it affect them well what we're thinking here is that we know that the Arctic and the sea ice is being lost at a rapid rate in the Arctic this is shown, we've shown the area lost over time and you can see it's sort of slowly diminishing and we reckon that sea ice will be all gone possibly by 2030 or a bit later in the century this will open up shipping routes that haven't really been available to normal transits to humanity it'll radically change some of the routes and trade which of course could make it more efficient maybe even fuel efficient which would be a good thing but what could the risk be well we've looked at this in our Arctic opening report basically the Arctic is a difficult and dangerous place to do business in you don't have the infrastructure there if you do have things like the usual boating accidents that you'd see all around the world it'll be much more difficult to remove the wreck to handle the damage, to rescue the people and also the environmental clear up will be much more difficult as we saw with the Exxon Valdes which Lloyd's paid a huge amount of money on in the early 90s so for example oil which will be degraded by bacteria in the Gulf of Mexico very quickly so after the deep water horizon the bacteria got to work on those oil slicks and started cleaning them up I'm still plenty around of course sadly but very quickly it turns it will be got rid of whereas in the Arctic oil can hang around for decades causing more and more environmental harm and then from an underwriting point of view the question will be is this risk there for the same marine risk as we would have for normal shipping routes and we would argue no the risk is higher okay what about investments so this I'm not trying to claim that 9-11 had anything to do with climate change but what it does show is how large political effects can have very big effects on markets I guess fairly obvious point so you have 9-11 at sort of more or less the top of the investment bubble and then you had a rapid fall in the stock markets I was at a life company at the time and we saw the market go from sort of six and a half thousand nearly seven thousand the book see right out of about three thousand and that left had a very big effect on insurance companies particularly life companies they had a lot of investments in equities at the time and their balance sheets were severely stressed severely tested so the point of this really is just to say the sorts of political stresses I was talking about earlier can have economic impacts and they will have impacts on the investment side of our portfolio as well and then the other area we're looking at is which I believe you've had a talk on recently so I won't spend too long on but stranded assets so this idea that to keep within two degrees you can only really spend about five hundred and sixty-five to eight hundred gigatons of carbon and yet the reserves on company balance sheets are around about three thousand gigatons so multiples on the oil company balance sheets then can actually be spent if we want to keep to two degrees target and what I suspect might happen with the increasing understanding of climate change for example you were talking earlier about the agreement between the US and China as people become more and more accepting of climate change at some stage people will realise I suspect that we can't burn all this carbon and that must I would imagine have an effect on the balance sheets of those companies so if you're investing in those companies you could see a significant right down of value I believe that's what was said to you before so we're thinking about that in terms of our own investments but also back to those liability calculations if there's large amounts of value taken off stocks who's going to be suing who and who's going to be blaming who so just to sum up so far we've got our nice balance sheet in balance but we're saying that the physical damage will affect our liabilities it will affect the premiums we charge so we'd have to hold more premium reserves it'll affect the capital we'd need to hold because events will be larger and we have to prepare for those larger events so the capital needs to go up and just at the time when you're really having to increase your assets our asset values potentially could be going down because of the investment impacts that I was describing earlier of course it won't become out of balance because that would be an insult for the insurer but what it would need to happen is you actually need to invest more on the asset side to counter out that there okay so how much longer should we carry on I think I mean maybe three or four more okay so just to say we haven't been taking this all on board and not doing anything we've actually been taking action and one of the things we did along with a number of other companies and about the Prince of Wales was to start something called ClimateWise in 2007 and this is a collaboration between many insurers now sort of global collaboration ClimateWise has a set of six principles at its heart which says insurers could be part of the action against climate change so we've got share our risk analysis with people, work with policymakers so the governments around the world tell our customers about the risks and try and explain them to people think about our investments and we can do about it think about our own staff and carbon footprints and then finally there's a governance piece which says this is an important board level topic so somebody at the board has to be responsible for it which we have and that's actually my boss Tom Bold ClimateWise has done things like sustainable claims management so we're trying to say if you have new for all policies and repair rather than replace we can be more sustainable in our own footprint we've also done things at Lloyd's we did a paper managing the escalating risks of natural catastrophes in the United States where we were trying to sort of softly lobby the government over there and say that I mean it's a bit self-serving inevitably but we're saying that government intervention in private insurance markets should be kept to a minimum because when governments intervene there's a danger that the true risk price isn't conveyed to the public and that can lead to the sort of behaviours that actually encourage people to take risk rather than to protect themselves and risk based pricing is fairest eventually although you may need to protect poorer communities in the interim and the government does have an important role to play in publishing things like maps, flood maps and that sort of thing and also in terms of design of buildings and where to build and then the Geneva Association that I mentioned earlier today have recently ratified a Kyoto Statement that they made back in about 2008 and this was signed by about 80 of the CEOs of the largest insurance companies around the world similar to climate wise it made some number of statements we were committed to enhancing our research promote litigation efforts etc so we've tried to be on the front foot as an industry and tried to say that we will play our part but we also need to think about protecting our own balance sheets and we've done work on valuing adaptation so you can use our modelling capabilities to say if the sea level does rise or the winds get faster or whatever and if you adapt your properties in certain ways how much can you reduce the risk so this says if you've got a hundred of current risk and then the sea level rises by 30cm more this coastal property the risk goes up to 186% of it's current levels on an annual loss basis but actually if you just and this is probably a bit easier for new build and existing properties but if you build them on 50cm stills you could actually which they do in the Caribbean you could reduce the risk down to below current levels so appropriate building adaptation can actually protect in the least in the short term against the rising positive climate change and then finally in the longer term I'd like to say that we can take an insurance approach to thinking about climate risks so there's all this debate about whether we should spend now to protect future generations and people do cost benefit analyses which in my view are largely quite flawed because they aren't thinking about future generations and they are thinking about the utility of the society, they're often just thinking about the impure money terms, discounted money which is I think a flawed approach what this shows from the IPCC report is how on the representative contribution pathway we're heading for four degrees by the end of the century which is a horrible prospect globally and there will be some very largely affected countries around the world but this work by a group called climate prediction.net which I know some people there they've actually looked at the uncertainty in all the parameters of climate models the things we don't know and said well supposing we sample from that uncertainty how big really is the width of the temperature rise and actually it goes frighteningly up to even 10 degrees now okay that's not very likely but the point is you can't rule it out because there's a lot of uncertainty and if you think like that you say well what would you do with insurance you buy insurance against the risk of your house burning down the risk of a very large loss it's not very likely like this but it's worth protecting against because it'd be so bad if it happened and I would argue that the same should be true with climate change we should spend the money now on mitigation to keep within those carbon targets for the whole future okay which I've just said so in summary one we have to hold capital for extreme events and climate change will affect that two there are a number of foreseeable of depths of various time periods and I talked about property liability political risk marine so there was lots of areas of the policies we saw investments may be affected too and consensus that we're seeing US, China etc could lead to only revisions of value this treble whammy on the balance sheets you've got your assets, liability and capital we've taken some action as an industry climate wise, Kyoto etc and we can use our expertise to help understand the value of adaptation and finally we should take an insurance approach to avoiding these risks thank you very much