IF THE Chancellor has space to think of such things just now, he should be glad that this month’s International Monetary Fund annual meeting is in Singapore rather than Washington. Otherwise he could hit America’s Eastern seaboard at the same time as Hurricane Gordon. Tropical storm Florence is hovering sullenly round the Atlantic; on the US naming list, Gordon would be next.
For the rest of us the significance is that Gordon would be only the seventh Atlantic tropical storm of the season. So far only one has become a hurricane. A year ago Katrina, the eleventh of 2005, had already entered the history books and insurers were on course for an $80 billion catastrophe bill for 2005, a second successive year of severe hurricane damage.
Annual weather variations still outweigh any global warming trends, whatever the rest of the season brings. A reinsurance conference starting tomorrow in Monte Carlo will focus on whether competition will force insurance premiums back down again after a mild 2006. But Katrina and its siblings whipped up US corporate activists, including pension funds from New England and California. They want global warming to be a must-act issue for corporate America. These funds are active in Britain. They could bring more frustration for non-executives and board committees, vicariously landed with personal responsibility for the future of the planet.
Typically, directors are asked to confess, effectively on oath, that climate change is a damaging reality caused by Man, then to build this into their strategy. Ceres, a network of lobbyists and active investors, is lobbying the US Securities and Exchange Commission to make all listed companies disclose the “financial risks of global warming” in annual reports.
Ceres has now turned its heat on the insurance industry, urging insurers to give business and consumers incentives to be careful with the carbon. The idea is that insurers will suffer from global warming, so it is in their collective interest to take action to stop it.
Unfortunately in this case, but fortunately from any other point of view, the insurance industry is not collective. Nor is the car industry, the oil industry, the electronics industry or even, in a growing number of markets, the electricity or gas industries. Most of these markets are fiercely competitive. Companies try to sell as much as they can by offering customers what they want at competitive prices. Only monopolists raise prices to restrict supply.
Insurers can take a positive role, for instance by developing “no-wind” policies for wind generators. They can research whether Toyota Prius drivers are a better risk than drivers of Ford Focuses and whether houses with solar panels are less likely to burn down. Well-run companies will seek out new opportunities and develop innovative products as well as responding more generally to market incentives. These are responses to economic signals: a little prodding does no harm. But the consequences of global warming in 2027 are irrelevant to the annual insurance market in 2007. And those who are climatically irresponsible today will suffer neither more nor less in 2027 than those who do all the “right” things.
Insurance premiums, like competing prices in any market, will influence consumer and corporate behaviour by responding to changing economic signals. More floods will soon make it uneconomic to build houses below sea level, unless the State negates the incentives by stepping in. High oil prices cut demand for gas guzzlers and boost sales of hybrid cars. The private sector, led by insurers, should help us to adapt sensibly to global warming by changing our lifestyles. The risks are then faced by the people who pay the premiums.
Companies operating in competitive markets cannot, however, indulge in social engineering to prevent some projected climatic disaster that has no present economic effect. Shell cannot unilaterally raise the price of petrol.
Only governments can do that. And their powers are limited. Chancellor Brown can change the rules of the power market, which favour natural gas, the main fossil fuel. But he found that, in one country, he could raise petrol prices only so far. Small nations such as Britain can make a meaningful contribution to ease global warming only by dramatic change, such as a 65 per cent switch to nuclear power or full reforestation.
Opec and the oil speculators have been more helpful. By pushing energy prices high, they allow governments to agree to keep them high, by taxation, on a global scale, within competitive markets. That would cut consumption and make many more non-fossil fuels economic: a suitable topic to thrash out at the IMF.
graham.searjeant@thetimes.co.uk
