Insurance and Climate Change in Europe: Existing Knowledge and Open Questions

Sophie Chemarin* ADEME-Ecole Polytechnique

Abstract While the last report from the International Panel on Climate Change (IPCC, 2001) noted that the evolution of climate will essentially be characterized by higher temperature, more accentuated hydrological cycles, and an increase of sea level, it also pointed out that all of these changes could reach a dangerous level during the forthcoming century. In this regard, the recent report on climate change conducted by the Harvard Medical School emphasizes that "the availability and affordability of insurance are essential to economic development in a world where hazards are abound and are increasingly unpredictable". It is thus through insurance that adaptation strategies to climatic evolutions should be defined and it is necessary to determine what are really needed to focus on today to prepare for tomorrow. This paper first proposes an assessment of where the insurance industry currently stands on climate change in Europe and defines research topics to further investigate. Then it tries to identify the opportunities and problems that may flow to the insurance sector and, in particular, points out that, beyond its own adaptation, insurance can help societies to adapt to these climatic evolutions. Finally, among all the recommendations to define adaptation measures, it poses the question of their evaluation and their efficiency in the context of scientific uncertainty.

sophie.chemarin@shs.polytechnqiue.fr

1- Introduction While the last report from the International Panel on Climate Change (IPCC, 2001) noted that the evolution of climate will essentially be characterized by higher temperature -with an increase over the period from 1910 until 2100 ranging between 1,4C and 5,8C-, more accentuated hydrological cycles, and increase of sea level, it also pointed out that, due to an intense concentration of greenhouse gas, all of these changes could reach a dangerous level during the forthcoming century. Although climate has always changed, the current evolutions are for the main part man-made and unfortunately, as the study from WWF International remarks1, this is an upward trend. Importantly climate change can have multiple and irreversible effects on societies and nature. Even if it is still quite difficult to evaluate the potential damages that these evolutions could involve, it is necessary to develop adaptation policies in order to moderate them and to benefit from opportunities associated with climate change. The recent report on climate change conducted by the Harvard Medical School for Swiss Re and the United Nations Development Program begins its study on financial implications by emphasizing that "the availability and affordability of insurance are essential to economic development, financial cohesion [...] in a world where hazards are abound and are increasingly unpredictable" (Swiss Re, 2005). Insurance can bring societies the necessary tools to implement sustainable development in this context and it is thus through it that adaptation strategies as well as new decisions instruments and cooperation networks between the different economic agents (policyholders, insurance, financial market, state) should be defined. The insurance industry has a two-fold responsibility. On the one hand, it needs to prepare itself for the negative effects that climate change may have on its business and on its customers. On the other hand, it can significantly help to mitigate the economic risks by providing appropriate products and services. In this regard, the paper will try to fill two main objectives. It first proposes an assessment of where the insurance industry currently stands on climate change in Europe, and it identifies the opportunities and also the problems that may flow to the insurance sector. Then it goes for a proactive behavior for insurers to both adapt their activities to the impacts of climate change and define products to help society to be prepared to face and limit these impacts. It is structured as follow. Section Two summarizes the current knowledge on climate change risks and define research topics, underlined by the literature, that still need to be further investigated. Section Three emphasizes the need to extend the current approach of insurance and adaptation. It proposes three topics to include into the process: develop a sectorial analysis of weather conditions impacts, define (and/or study) products that both mitigate risks and assure sector's adaptation, and lastly integrate evaluation procedures of the adaptation's measures and the instruments used by the insurance industry. Finally, section Five concludes by presenting an agenda for research to determine what are really needed to focus on today to prepare for tomorrow.

Allianz Group, WWF International (2005), Climate Change, London.

2- Overview of climate change research Most important studies on insurance and climate change in Europe are conducted by the Association of British Insurers (ABI)2 under the supervision of Dr. Andrew Dlugolecki3. Some reinsurers such as Swiss Re or Partner Re4, have also published world studies on a such topics, but they usually focus either on the impact (in term of cost) of such patterns on the insurance sector, or on the financing of particular weather-related events. Even the recent study "Climate change futures" (Swiss Re, 2005), which proposes a large discussion on the vulnerability of societies to different risks induced by climate change, do not really consider the contribution that financial services could bring by fostering loss prevention and recovery. The approach of ABI is to analyse in which ways underwriting and more generally risk management are weakened by climate change by identifying vulnerability factors, also called climate change risks. The report "A changing climate for insurance" (ABI, 2004) points out two kinds of such factors. One is related to the direct impacts of climate evolutions on insurance activity, called "technical risks", whereas the other is linked to the characteristics of the insurance market in a context of climate change, also called "market -based risks5. Others important studies (Swiss Re 2005, ABI 2005, WWF-Allianz 2005) evaluate the potential impact of these risks, according to the different scenarios predicted by the IPCC, on the financial sector (Swiss Re 2005, ABI 2005) and on each line of insurers activity(WWF, Allianz, 2005). The goal of these studies is to evaluate the threats and insurability of these risks but also to define the opportunities that could arise.

ABI, 2004 and ABI, 2005 Dr Dlugolecki was the chief author of the Insurance and Financial Services Chapter in the Second Assessment Report of the Intergovernmental Panel on Climate Change (1995), and has edited that chapter in the Third Assessment Report (2001), Tyndall Center for Climate Change Research 4 Swiss re (2005), Partner Re (2005) 5 This definition of climate change risks is also used by Swiss Re (2005)
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Table 1: Climate Change Risks (ABI, 2004)

For example, a climate impact on the property line of business, such as an unprecedented accumulation of extreme events or an impact on other underwriting lines, such as increased losses from business interruption, both of them could simultaneously happen and threaten the solvency of insurers. On the other hand, they could also increase the demand of insurance coverage and stimulate the development of alternative risk transfer products (cat bonds, weather derivatives...). Table 1 presents the threats and opportunities that climate change could cause on financial sector. This section aims at further investigate such opportunities and also problems that may arise for the insurance market. To do so, it first analyses what the literature calls climate change risks (2-1), and it determinates their impacts on insurance underwriting processes and strategies (2-2). Finally, it defines different research points, analysed by the economic and professional literature, to further investigate (2-3).

2-1 Climate change risks Technical risks are defined as changes in return period, in strength and sequences of events,

difficulties in anticipating hazards, apparition of hybrid and/or novel event6, all these phenomena that climate evolutions could induce according to the different predictions of the IPCC (2001). In contrary, market-based risks concern more particularly the determinants of the insurers activity (market's factors). There are, for example, changes in consumer needs and in pattern of claims, evolution of the legal framework or events unrelated to weather, but compounding to climate change impacts, they amplify the net adverse impact on insurers (parallel stresses). In the following, we present the different characteristics of these vulnerability factors, in order to understand the ways they influence insurance activity.

2-1-1 Market-based risks As underlined by ABI (2004) climate change is already impacting insurance industry in many different ways and insurers need to prepare themselves for the negative effects that climate change may have on their business and on their customers. One of the key findings identified is marketbased risks. They are defined as the effects that climatic evolutions can potentially have on insurance market's factors. These effects can be illustrated, for example, by changing in customers needs, which could require new or modified insurance products. Indeed, as ABI (2004) remarks, emerging new technologies in response to climate change pressures, such as renewable energy assets, as well as new liabilities (for example, directors may be held responsible for the environmental impact of their businesses in future) will require insurance. Transfer mechanisms, enabling business and society to efficiently manage these risks, will thus become increasingly valuable. Moreover than this evolution of agent's insurance strategies, the observed increasing weather exposures also impact the level of coverage that they ask for. Empirical studies analyse agents behavior to deal with major risks. Kahneman, Slovic and Tversky (1982) show, for example, that large events imply extreme reactions from people, who appreciate the likelihood of an event according to their prior experiences towards risk. It generally induces an over or under estimation the objective risk7. Perceptions of risks as well as preferences contribute to individuals' decisions. In this regards, Kunreuther (1978) studies agents' willingness to buy insurance against natural disasters. He reveals that only few people buy insurance against catastrophic risk, while they insure against more frequently risk, and those who do purchase insurance are likely to cancel policies if they don't have made a claim after a few year8. Inadequate projections of all these changes could

Hybrid events are disasters involving multiple source of insurance losses. Novel events are events for which catastrophe models to date inadequately include emerging non-linear trend as well as the multiple serial events associated with climate change. 7 Kahneman, Slovic and Tversky (1982) underlined the cognitive biases, which induce such behaviors, in front of extreme events. The more relevant are the availability bias and the gambler's fallacy heuristic and describe this influence of prior experience upon risky choice. 8 Kunreuther (1978) shows that before the the 1989 Loma Prieta earthquake in California, Kunreuther (1996) notes that 34% of the Californian homeowners thought that earthquake insurance was unnecessary in 1988, while they were only 5% to think so after 1989. Moreover, 11% of the uninsured households decided to purchase coverage between 1989 and 1990. Today less than 15% of California homeowners have earthquake insurance, down from 34% in 1995 just after the last major earthquake occurrence

arise from climate change and induce a flight from insurance into others risk-management products (Swiss Re, 2005). Market-based risks are also linked to the evolution of regulatory measures to share out the financial responsibilities, when a disaster occurs. To deal with climate change, emission trading regulation is already in place and has an immediate impact on claims cost. For example (ABI 2004), requiring higher thermal efficiency in replacement windows. But above all, the uncertainty on the legal and jurisprudential environment, such as changing expectations of insurance regulators is much more likely to increase the cost of insured claims. Climate change could have others impacts on market's factors. Insurers, who do not enough prevent losses arising from climate change, in the eyes of policyholders, are exposed to a reputationnal risk. Swiss Re, 2005 notes that it is, in UK, the most greatest risk that insurance industry faces. If market-based risks are the results of the evolution of market's characteristics in a context of climate change, they finally refer to the global evolutions of society and to the subjective perception of risks that agents have to deal with. As Chemarin (2005) remarks, even if the technical, economical and social evolutions are considered as a real progress, they could also have a perverse effect. Thus, for example, networks that contribute to economic development, also increase exposition to potential natural and man-made catastrophes. The intense economic activity, and the urban concentration induced, show that risk becomes more endogenous and its potential consequences more permanent. All these changes modify the nature of risks and create uncertainty. What Beck (2003) called "the risk society" describes this "risk increasing universe", where the definition of risk, the context in which it appears, and the ability of public and private agents to deal with, are modified. Climate change is one of the main specificity of this "Risk Society", in so far as many uncertainties remain on the extent of its manifestations but also on the politics and tools develop to deal with it. There is no doubt that it will increase the impact of all these vulnerability factors on insurance industry. 2-1-2 Technical risks Technical risks, related to the direct impact of climate evolutions, are among the most important preoccupations of insurers. If all the studies on climate change are focused on the cost and consequences of major weather risks on the insurance and reinsurance sectors, one should note that the rising socio-economic costs related to weather damages suggest another increasing vulnerability.

- Evolution of weather events It is now admitted that the number of natural catastrophes have continuously increased this last ten years. Swiss Re noted (Swiss Re, 2006) that from 1970's to 1980's, the number of such events were around 70 each year, it has been showing an upward trend from 1985 to nowadays (fig 1).

Figure 1: Natural disasters from 1970 to 2005 (Swiss RE, 2005)

Such a remark could also be applied to insured losses. As Swiss Re report recorded, in the period between 1987 and 2004, property insurance losses due to catastrophes averaged USD 23 billion per year, with some high records corresponding to the different peaks on figure 1 (Typhoon Mireille in 1991, hurricane Andrew in 1992, Northbridge earthquake in 1994, winterstorm Lothar in 1999, hurricane Ivan in 2004). The record hit by insurance losses due to natural catastrophes in 2004 (116 natural disasters, USD 9 billion of insured losses) is largely exceeded by the first data recorded for 2005: the insured losses are up to USD 83 billion, in which USD 60 billion9 are due to hurricanes (Rita, Wilma and Katrina). According to these remarks, some main evolutions of the characterization of the weather risks should be noticed (Vilnet, 2006): - Increasing frequency and increasing intensity. - New combination and correlation of risks: a natural catastrophe could be a series of different kind of weather events, such as we observed recently in New Orleans (a hurricane followed by floods). Such new scenarios of catastrophes, also called hybrid events, and all major events today have an impact on all the insurance business lines. - Increasing geographical exposition: the impact of a particular weather event is not limited to a local area, the propagation of the physical as well as the economic losses could now be extended on different countries (Tsunami, 2004) or states (US hurricanes, 2005), even if these areas are not currently exposed to such catastrophes.

- Potential impact of climate change on weather events Such rising losses could be mostly explained by changes in land use and the concentration of people and capital in vulnerable areas. However, as the International Panel on Climate Change

J.N GUYE (AXA), Risques mergents et risques majeurs: l'assurance en questionnement, Sminaire Chaire de Dveloppement Durable, EDF-Ecole Polytechnique, 28 fvrier 2006

(2001) noted, global warming could also have a significant impact on the intensity of such exceptional events10. If socio-economic factors increase the cost of weather disasters, a recent study conducted by ABI (ABI, 2005) notices that climate change could also significantly increase the cost of events such like windstorm and flooding, particularly in Europe. By using climate change scenarios to alter the characteristics of such weather events, in catastrophe models (AIR), they thus show that annual losses from the 3 major storms studied (US hurricane, Japan typhoon, European windstorm) could increase by 2-3 by the end of the 2080's. Focussing on Europe, the increase in wind-related losses should be at least 5%. To deepen this analysis, ABI also evaluates the impact of storm-surge and intense precipitations generated by windstorm, under high greenhouse gas emissions. In Europe, they notice an increase in annual cost up to USD 120-150 billion.

2-2 Main implications for (re)insurance market The climate change risks, that insurers are exposed to, according to the literature, already influence their activities. This subsection points out the main effects that those risks have on processes use for their management (evaluation, insurability and financial coverage), and emphasizes the arising challenges for insurance to deal with these effects and to adapt to them.

2-2-1 Actuarial evaluation of climate change risks Risk evaluation allow the definition, in the one hand of appropriate tools to deal with it, and on the other hand of the acceptable level of risk, which society can be exposed to. In a context of scientific uncertainty and increasing sinistrality, weather risks assessment methodologies, particularly catastrophe models, are weakened. Indeed, ambiguity on the probability of an event and uncertainty on the potential damages make each catastrophic event unique and has an impact on the perception that people have of risky situations (see 2-1-1). Uncertainty modifies insured behaviors and removes them from theoretical predictions. If people willingness to buy insurance changes, it becomes difficult to gather information, build financial protections and if they do not believe in the existence of major risks, prevention measures could not be determined and applied. Moreover Kunreuther, Meszaros, Hogarth and Spranca (1995) have revealed that insurers also have difficulties to evaluate uncertain situations. They are averse to ambiguity and are likely to ask for a higher premium than the one they should have set if the situation was clearly determinated (e.g. the probability of a disaster as well as the expected damages are perfectly known).

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"Global climate change is likely to bring changes in climate variability and extreme events as well. Features of projected changes in extreme weather and climate events in the 21st century include more frequent heat waves, less frequent cold spells (barring so-called singular events), greater intensity of heavy rainfall events, more frequent mid-continental summer drought and greater intensity of tropical cyclones".(IPCC, 2001)

In term of climate change risks and uncertainties management, it raises a fundamental problem: the actuarial approach of major risks management, usually based on past experience, can not be applied. It should be upgraded by taking into account, on the one hand, the increasing frequency of extreme weather events11, and the apparition of complex scenarios of disasters, and on the other hand, the evolutions of societies and the subjective perception of risks. Thus climate change reveals two important challenges: integrate the cognitive approach of rational choice into management processes, and develop communication on climate change risks and uncertainties to reduce the biased perception that agents could develop.

2-2-2 Insurability and financial coverage of weather risks The traditional insurability criteria, as a part of risks assessment, become also uncertain. What is insurable today had to be evaluated in a this context of climate change and potential extreme weather risks. According to the new characteristics of weather events, insurers could potentially decide to limit the coverage of different risks and/or refuse to insure others. Moreover, in face of such frequency and intensity of weather events, the need and the cost of capital for both insurers and reinsurers will raise (fig 2). The predictions of the ABI report (ABI, 2005) on risks capital requirement show, for example, a potential increase by over 90% for US hurricanes, by 80% for Japan typhoon and by 5% for European windstorm12, according to the climate change impacts scenarios.

the frequency of disasters, of which losses exceed USD $10$ billion, is now estimated to happen every 30/40 years (Vilnet, 2006) 12 In Europe, only the impact of climate change on the more severe storms was considered, which explains this low increase in capital requirement. However flooding impacts of climate change should have a more significant effect on capital requirement but it was not evaluate in this report (ABI, 2005)

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Figure2: Impact of climate change on probability loss distribution and implications for risk capital requirements (ABI, 2005)

The main consequence for insurers and reinsurers is to develop insurance innovative strategies or adapt existing ones to deal with climate risks according to the predicted climate change scenarios. The report "Uncertainty, precaution and insurability" (Chemarin, Henry, Michel-Kerjan, 2004) points out that two kinds of catastrophe insurance strategies are developed in Europe: pooling arrangements through private and public partnerships (PPP) and alternative risk transfer. These strategies have significant incentive effects on preventing losses and reducing uncertainties. It is important to evaluate their benefits and costs in term on mitigation, financial capacity and uncertainty learning. Since conventional reinsurance arrangements may cover a smaller proportion of total weatherrelated losses (ABI, 2005), it will give incentives to insurers to resort to alternative risk transfer (ART) and to limit their risk exposure by transferring natural catastrophe risk into the capital market. Catastrophic bonds (Cat Bonds) already allow insurers to do so. They are financial contracts that pay out on fulfilment of a trigger condition and diversify funding base for extreme catastrophic risks by accessing capital, which is usually not available to insurance. Today Cat Bonds market is growing slowlier than we could have imagined. Economic research as well as insurer studies attribute this low development partly to high transaction costs and to the unfamiliarity of investors with insurance risks. It is an important challenge for research today to solve what Bantwal and Kunreuther(1999) called a learning problem, and which induces the relatively large premium of Cat Bonds, and to show how attractive they could be in the context of climate change. The recourse to alternative risk transfer solutions shows the capacity of the insurance sector to adapt to catastrophic events. But, as Piserra, Najera and Lapieza (2005) underline, the problem is knowing if this adaptation is fast enough and above all, the degree of acceptation of these instruments within such a traditional sector. Moreover, one of the main advantages of requiring to

the capital market, through such alternative solutions, is that insurance risks are not correlated to financial market risks. On the one hand, climate change might be likely to have an impact on those risks and thus on the performance of such instruments. On the other hand, the increasing frequency of non-climatic catastrophic risks, such like technological risks, terrorism, and of their accumulation also have a direct impact on the effectiveness of capital markets, and thus on the development of ART solutions. According to such remarks, the attractiveness and the long term durability of the ART solutions to deal with major weather risks, in regard to climate change scenarios as well as to others major risks evaluations, should be identified as a need of research.

2-2-3 Role of state Research works on behaviors under uncertainty underline that decision makers but also states could sometimes choose to ignore available information on the potential existence of "risks". From a social point of view, it could involve collective blinding behaviors which eventually result in human and environmental catastrophes. The asbestos tragedy is a perfect illustration of such behaviors. It invites us to redefine the role and the responsibility of each kind of economic agents. State, as a regulator, should share out the financial responsibility of potential damages and give incentives to firms and individuals to ascertain their risks, develop their knowledge about uncertainty and define prevention measures, without slowing down innovation. Major weather events also force private agents to redefine their financial coverage. It raises the question of the government's intervention. What are the arguments for this intervention in a such context and how should it be implemented? A usual justification to states intervention is when stresses on market makes it enable to work efficiently. Regarding insurance, the intervention of states is justified when insurers could not provide financial cover to their policyholders. It is often because of factors that limit insurability of risks and particularly when people are constrained to be insured by law. For example, if insurers could not propose policies because of asymmetric information e.g. incomplete information on potential damages as well as on the probability of an event- or because the juridical environment is not stable, governmental intervention is justified and this is the case for extreme natural events. The design of the public intervention can have different forms. It could be a governmental insurance (state is the insurer at the first level) through a public fund, a reinsurance at last resort through public and private partnership (NAT CAT system in France) and finally state could also take the role of a lender at last resort. In Europe, PPP are often developed to deal temporally with catastrophic risks, but the problem of a long term insurance strategies is still unsolved. Investigating the role of state' intervention, to deal with major potential risks, raises the question of their optimal sharing, but above all it underlines the fundamental research challenge of defining new economic policies in a context of scientific uncertainty.

2-3 Research questions

As Dr. Evan Mills13 remarks, "insurance are well positioned to participate in public-private initiatives to monitor loss-trend, improve catastrophe modelling, address the causes of climate change, and prepare for and adapt to the impacts" (Mills 2005). However as we previously noticed, there are many problems to solve before insurance becomes an efficient tool to adapt to climate change. Financial services industry needs to adapt its internal processes and policies and its product to meet the challenges faced by its clients, as well as to safeguard its own viability (Allianz-WWF, 2005). To reach these aims they have to develop a new approach of risk management. The four following points need to be further investigated. Up grade risks evaluation models: gather information on future climate risks or current and non-modelled risks (in France, flood risk is not evaluated in contrary to wind-related risks), and thereby improve the underwriting of climate risks. Evaluate the insurability criteria in regards to climate change predictions and socioeconomic factors. Confront existing insurance schemes to deal with climate risks (private-public partnership and alternative risks transfers mechanisms), to climate change scenarios, and evaluate the benefit in term of risk mitigation and capital requirement. Pooling arrangements through public-private partnerships to control exposure to natural catastrophes and other climate-related risks define a different approach of risk and uncertainty management, by founding a cooperative network among all the economic agents (government, insurers, reinsurers and policyholders). The questions to solve are the optimal uncertainty and/or catastrophic risk sharing between all these agents, and the determination of the role of each in terms of loss prevention and recovery.

This previous section emphasized the relevant conclusions that the current literature on the impacts of climate change points out. The following section proposes to widen the research area by redefining the insurance adaptation process to climate change.

3- For a larger adaptation process The current studies on insurance and climate change mostly focus on the global impact of extreme weather events and more particularly on damages to property, which represent a significant increasing cost for the insurance industry. But more than its own adaptation to these negative effects that climate change may intensify, insurance has also the responsibility to help society to mitigate the economic risks linked to climatic evolutions and, as noticed by Allianz Group and WWF (2005) "to enter the low-carbon economy by providing appropriate products and services." Adaptation is defined by the IPCC (2001) as adjustments in ecological, social or economic systems in response to actual or expected climatic stimuli and their effects or impacts. Going deeper in the questions of what should be an adaptation strategy in the context of climate change, we should also consider the problematic of insurance and climate change according to the different economic

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Berkeley, CA: Lawrence Berkeley National Laboratory

sectors, particularly the weather-sensitive ones, and analyse the impact of current and predicted climate variations on economic development, rather than focussing on the extreme ones (3-1). Reaching the aim of entering the low-carbon economy invites us to analyse the existing insurance products that combine both mitigation and adaptation to climate risks, and sets the question of the opportunities that are likely to arise (3-2). Finally, being for a larger adaptation process also means incorporating the evaluation of the adaptation measures defined. The context of scientific uncertainty related to climate change, and the increasing frequency and intensity of major catastrophes potentially involved, make the existing tools that should enhance security and/or precaution less efficient. Adaptation is thus a difficult challenge to reach, and it is necessary to know if the decisions taken are efficient regarding the existing scientific knowledge and the observed phenomena. In this regard, the section lastly underlines the need of appropriate tools to evaluate the adaptation in a context of scientific uncertainty (3-3). 3-1 A sectorial analysis of climatic evolutions Agriculture, forestry and energy are maybe the more exposed sectors to climatic evolutions. For example, weather events already bring the agricultural sector significant costs. The case study on the European heat wave (2003) conducted by Swiss Re reveal a direct economic cost higher than USD 13 bn14, and there is no doubt that an increase in the severity of such events will also increase it. At a sectorial level as well as at a global one, the problem of the optimal insurance strategy to deal with weather risks scenarios should be analysed. But climate risk does not only mean extreme events, it is also defined (Marteau, Carle, Fourneaux, Holz and Moreno, 2004) as the evaluation of the uncertainty on the economic estimator due to the variability of climate index. In many sectors, climate index have a significant impact on firms activity. Their variability contribute to explain a large part of the variability of their results. However only few firms have a real politics of climate risks management. Weather derivatives are financial instruments used by companies to hedge against the risk of weather-related losses. They are climate index-based options usually sells to energy company by insurers, mutual funds or pension funds, that allow the holders to have an access to capital. The investor providing a weather derivative charges the buyer a premium. The indemnity is then paid on a specific trigger, e.g. temperature, over a specified period rather than proof of loss. As the latest report of ABI on climate change (ABI, 2005) remarks, such alternative risk transfer tools could represent a real opportunity to deal with climate deviations and limit the potential shocks on profitability. Among others advantages, they can help to cover difficult insurable risks and eliminate the problem of damages measurement and of moral hazard. Even if such alternative instruments are difficult to price or require accurate prediction of information, potential applications are already considered in different economic sectors, such as agriculture or energy, highly affected by weather conditions.

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The livestock and crop losses were about USD 12,3 bn. Fire and timber losses were about USD 1,6 bn (Swiss Re, 2005)

Since alternative risk transfer mechanisms, through weather markets, offer new opportunities to transfer weather risks outside a region or a country particularly exposed, they are called to be increasingly used to deal with climate variability. In this regard, one should evaluate how they can perform in a context of scientific uncertainty and according to the characteristics of the economic sector concerned, by further investigating the comparative advantages and the substitutability of weather derivatives and traditional insurance. 3-2 How to limit climate change impacts through insurance A general conclusion of the different studies on financial risks of climate change, we reviewed, is that many costs of climate change could be avoided by taking action today. The ABI report evaluates, for example, that a decrease of carbon dioxide emissions from the high to the low scenario would reduce the impact on losses for extreme windstorms by 80% and will limit the increase of flood risk across Northern Europe, saving USD 120 billion each year by the 2080's. To introduce our paper we noticed that insurance is essential for the economic development and that new decisions tools as well as the cooperation networks between agents should be defined. Beyond its own adaptation to climate change, insurance has a key role to play by developing products that promote new technologies allowing people to limit carbon dioxide emissions, for example by saving energy, reduce damages from weather events and enhance sustainable development of Societies. As Mills (2005) underlines, measures that integrate climate change mitigation and adaptation can both limit the exposition of insurers in term of solvability and support their profitability. An empirical study (Mills, 2003) evaluates the costs and benefits of three alternative risk transfer tools to reduce the risk of underperformance in the energy sectors: Savings Guarantees, Performance Bonds and Energy-Saving Insurance (ESI). The author focuses his analysis on the ESI in so far as it incites firms to implement efficient energy saving plans. Indeed, this tool is a formal insurance contract between an insurer and a building owner. In exchange of a premium, the insurer agreed to pay shortfall in energy savings below a pre-agreed baseline, less a deductible. As the author notices, ESI offers a significant advantages to others forms of risks transfer and particularly the potential for enhancing existing energy saving policy. ESI is widely practiced in Canada and in the US. In Europe the global market of risk transfer is slowly growing up, but insurance products such as ESI are still not well-known. Studying the opportunities that can arise by developing them to both limits the impacts climate change and helps agents to adapt to is a challenging open question.

3-3 Adaptation to climate change is also evaluate the measures defined Surprisingly, a question rarely mentioned in most of the studies and reports on adaptation and climate change, is about the efficiency of the new and existing regulations as well as the developed strategies to deal with climate change risks. Nevertheless, as we emphasize in all this text, it is a central question, and thus it should be a main part of the current debate and research program on this pattern. To define and implement adaptation policies, one should determine the acceptable level of risks for society, combining technical as well as economic and social knowledge. Different approaches can be used to evaluate the effectiveness of a decision that is likely to induce risks: cost-effectiveness

analysis, risk-risk analysis, impact studies and finally benefit-cost analysis. All these evaluation tools could be applied to private and public decisions. The benefit-cost analysis (BCA), even if it is seldom developed in France contrary to the UK or the United States, might present certain advantages in such a context. For example, as Treich (2005) suggests, BCA enhances transparency of public decisions and allows for a better assessment of their efficiency. As a recent conference on BCA and risk prevention concludes15, it is not a necessary condition, neither than a sufficient one to choose regulation or risk controlling instruments, but it provides critical information for decision makers and improve other evaluation approaches. BCA is required for major environmental, health and safety regulation int the United States for 25 years (Hammit, 2006). Thus, it should be a greater tool to evaluate climate change adaptation strategies, in particular new liabilities and insurers strategies to mitigate climate change risks. The goal of benefit-cost analysis is to increase security at a lower cost before taking a decision. Today, BCA is not completely able to capture all the factors that are judged to be important in making social policy and/or in developing insurance strategies. It proposes some elements to deal with subjective perception of risk, but taking scientific uncertainty and long term policies or investments (sustainable development) into account are challenging research topics. Even if substantial improvements have been made to apply a such method, some more research on the detailed rules for it application in Europe (and particularly in France) is necessary.

4- Conclusion- An agenda for research To conclude this text, we could say that the main concern for the future is to find an optimal way to implement a precautionary approach of climate change risks. To reach this ambitious aim, all the traditional approach of risk management has to be analysed and redefined in regards to climate change predictions as well as Societies evolutions. To determine an agenda for action, as many insurers and reinsurers reports propose to do, one should study all the open questions described in this text and listed below, in order to determine what are really needed to know or to matter today to prepare for tomorrow. 1) Evaluation of climate change risks: Global and sectorial characterization of risks: technical risks, market-based risks, climate variability risks. Up grade risk evaluation models: gather information on future weather risks or current and non-modelled risks(in France, flood risk is not evaluated in contrary to wind-related risks) and thereby better predict and underwrite climate change risks. Evaluate the insurability criteria in regard to climate change predictions and socioeconomic factors, and define what should not be insurable. 2) Sharing and controlling climate change risks:

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BCA and Risk: stakes and practices conference, INRA - ICSI, April 4th, 2006

Evaluate and integrate the impact of the subjective perception of risks and uncertainties on their management but also on the regulation policies. Determine where the research stands on climate change risks communication and intensify communication about them and in particular major risks. Confront existing insurance schemes to deal with major climate risks (private-public partnership and alternative risks transfers mechanisms) to climate change scenarios and evaluate the benefit in term of risk mitigation and capital requirement. Point out innovative tools to control exposure to natural catastrophes and other climate-related risks and evaluate them. Analyse a priori the repartition of financial responsibility between agents for potential damages related to climate change risks and identify potential new liabilities from carbon emission. Define incentives for firms to potential risks learning and innovation. Analyse and develop existing insurance tools (for example: energy saving insurance which combine mitigation and adaptation) to incite people to extend attenuation policies such as energy saving plans. Evaluate the impact of climate variability (increasing intensity of drought and/or precipitation) on private sector activity - agriculture and energy- and point out the ones we should deal with in priority. Finally, analyse, at a sectorial level, the role of existing insurance scheme as well as the possibility to develop financial market instruments for a current management of this variability (weather derivatives and other weather indexed options). 3) Evaluation of adaptation measures Study how existing evaluation methodologies and particularly cost-benefit analysis could be applied in a context of scientific uncertainty. Evaluate existing the different existing tools to control climate risks (insurance strategies and regulatory measures). This agenda for research, we propose to fill out, is based on the fundamental pillars of risks management -the evaluation, the sharing, the control of risks and the evaluation of tools or measures implemented- but it is still needed to evaluate the priority of each of the proposed research topics.

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