Capital markets gear up for climate change

LONDON (Reuters) – As the world wrangles over how to fight climate change, with national leaders to meet in Copenhagen early next month, capital markets are gearing up to handle the consequences if the effort fails.

The insurance industry, including reinsurers, who distribute risk around the sector, has traditionally been the main way to hedge against hurricanes, floods and other natural disasters.

But climate change could increase the scale and frequency of these disasters so drastically in coming years that traditional insurance might become unable to handle the burden.

Much of the risk would have to be shifted into the capital markets, where financial instruments such as catastrophe bonds and hurricane futures may boom, and increasingly exotic instruments are being developed to spread the burden further.

Reuters