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Insurance and Climate Change: A Matter of Policy
Joel Makower, 11 Dec 05

If government policies won't lead to aggressive action on climate change, maybe the insurance industry will.

It seems to have gone largely unreported in the U.S., but in the past week, two developments have shaken the largely staid world of insurance. On Tuesday, preliminary estimates released by the Munich Re Foundation at the international climate conference in Montreal found that world has suffered more than $200 billion in weather-related economic losses over the past year, making 2005 the costliest year on record.

Just days before, 20 leading U.S. investors urged 30 of the largest publicly-held insurance companies in North America to disclose their financial exposure from climate change and steps they are taking to reduce those financial impacts. The group cited the enormous risks that insurance companies face from escalating losses caused by extreme weather events and the financial risks and opportunities associated with climate change.

According to a recent study by the Ceres investor coalition, U.S. insurers have seen a 15-fold increase in insured losses from catastrophic weather events in the past three decades -- increases that have far outstripped growth in premiums, population, and inflation over the same time period. The study, Availability and Affordability of Insurance Under Climate Change: A Growing Challenge for the U.S., warns of larger financial losses in the years ahead if climate change trends continue and no actions are taken to face the challenge.

The investor demand comes on the heels of devastating back-to-back hurricane seasons in the U.S. that caused a record $30 billion in insured losses in 2004 and as much as $60 billion in insured losses from Hurricane Katrina alone in 2005. Worldwide, the $200 billion in damages cited by Munich Re significantly exceeded the previous record of $145 billion set in 2004. More than $70 billion in 2005 losses were covered by insurance companies, compared to some $45 billion in damages last year, according to the Foundation.

The insurance industry has reason to be worried about such trends. A study in June (PDF) by the Association of British Insurers found that climate change could increase the annual costs of flooding in the UK almost 15-fold by the 2080s under high emissions scenarios. If climate change increased European flood losses by a similar magnitude, annual costs could increase by up to $150 billion.

In the ABI study, using high emissions scenarios (where carbon dioxide levels double), insurers' capital requirements could increase by over 90% for U.S. hurricanes, and by around 80% for Japanese typhoons. In total, an additional $76 billion could be needed to cover the gap between extreme and average losses resulting from tropical cyclones in the U.S. and Japan alone.

What can the industry do? Answers can be found in a nearly ten-year-old study by the Lawrence Berkeley National Laboratory (and funded by the U.S. Energy Department):

The insurance industry can take a reactive approach to mitigating climate-change risk by raising deductibles or withdrawing coverage. Alternatively, the industry can take a proactive approach by, for example, encouraging actions to reduce greenhouse-gas emissions.

Energy consumption is the largest contributor to global climate change, so promoting energy efficiency is a particularly promising strategy. Many energy-efficient technologies also have the potential to reduce ordinary insured losses involving property, health, or liability. This report illustrates 60 specific ways in which targeted energy-efficiency improvements can translate into reduced risk of insured losses. The measures can reduce losses from: fire, ice, wind, and water damage; temperature extremes; occupational injuries; poor indoor air quality; equipment performance problems; and uninsured drivers. These loss-reductions translate into benefits for a variety of insurance providers, including property-casualty, professional liability, health, life, workers' compensation, business interruption, and automobile.

Promoting energy efficiency aside, there are even tougher measures coming from the big insurers.

Swiss Re, Munich Re's competitor and one of the world's largest re-insurers, recognizes climate change risk to be a potentially serious exposure for directors and officers. It now requires companies to disclose their climate strategy as part of their D&O insurance application.

The message is implicit, if not explicit: "If you don't care enough about the risks to your company resulting from severe climate change, we just might not insure you."

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There is much to be positive about in this article, but I wonder if there's actually enough meat on the bone for this to be a significant social change driver?

I mean, the insurance companies have never been recognised as visionaries of sane environmental practice, andd for all the 15-fold increases cited above, we're still left with a "worst case" scenario where investors need another US$75 billion in equity cover.

But surely that is just chump change for global capital? Easily affodable by vested interests who would rather keep the system as is (high material consumption driven by carbon energy utilisation) rather than risk losing their seats of privelege by advocating a shift to a low energy intensity future?

I just don't think these "loss" numbers are that important as meaningful change drivers. The insurance companies will simply charge more, pay out more, and the massive re-construction effort is good for jobs. Who's worried?

Posted by: John Brisbin on 11 Dec 05

It's amazing when I read articles like this and then think about the treatment that climate change gets here in America. Even the insurance industry--among the largest of the vested interests in the global economy--is gearing up for it.

Then I turn on the TV and see our government say that more evidence is necessary and talk to some people and hear them say that it's all a lie. I admit those people are in the minority, but not by much.

I really hope this gains traction with the insurance industry. It's one of those fundamental parts of the global economy, so any changes there are guaranteed to get the rest moving a little more. Although I do understand John Brisbin's concern... we'll have to watch this closely.

Posted by: Bolo on 12 Dec 05

John, I definitely think there's enough muscle to get some change, particularly when viewed in the context of the other things going on, at least in the US. 2005 in general and Katrina in particular have had some serious impacts--the insurance impacts are going to show up in January when homeowners get their bills. The fuel impacts (lost production and snarled distribution due to Katrina) have been here for 4 months.

I live in Texas. States don't get any redder than this one. The people I speak with (Republicans by far) just shake their heads in wonder when the (Washington) Republicans continue to "question" global warming. We've got half the population of New Orleans sitting around our in Houston and Dallas. Finally, we have facts on the ground, our ground, that can't be denied. The impression I'm getting from my fellows is: "they're either bought or stupid."

The short answer though, is grab them by the wallets and their hearts and minds will follow. Whatever risks you can't insure, you must bear yourself. That connects the dots in a way that academically toned alarms do not.

Posted by: davidg on 12 Dec 05

Bull. With aarp and baby boomers in total control the only way you will get such a change is if you convince BOTH those groups to give alot up.

And that is about as likely as me winning humanitarian of the year award.

As for insurance companies they arnt saying go green they are saying dump risks. Sell the questionable insurance policies to other companies so you reduce your risk.

What you will and akready have been seeing is companies selling thier more risky liablities to various companies designed to wrangle money out of such hgh risk ventures. Mostly by going bankrupt if too many claims come in at once.

Also look to see getting insurance in many coastal areas become near impossible and very spendy.

Oh and yes the oil industry already expected this insurance mess thats WHY they stopped going full bore toward oil rigs over a decade ago. The insurance costs for those rigs was projected to go balistic.

Being conservative and thats what most all insurance companies are isnt about ignoreing ckimate change and enviromental issues its about trusting nothing but the hard facts and planning for what you cant nail down as a hard fact.

Climate change itself has been a hard fact for quite a few years. Global warming itself was NOT until recently. How its being driven still is NOT a HARD fact so yes conservatives as always plan for the worst. And that my friends is that global warming is not being driven by co2 so much as something else we in our fight vs co2 will increase ALOT and thus .... such as agriculture and city heat island effects and and and and and.

So many ways to be wrong so few to be right.. and even if we get it right we have a snowballs chance in hell of getting it done soon anyway.

And the human race doesnt exactly have a good track record on this sort of thing.

Posted by: wintermane on 12 Dec 05

...and this year's greatest humanitarian is...Wintermane! :)

I think a key point that may have been missed is that it's not, say, Allstate, that is pushing this, it's the reinsurers. The last links in the chain. The ones that Allstate buys its insurance from. These folks are basically telling the retailer middlemen that they need to get their houses in order. So, they'll cherry-pick the reasonable risks and reinsure those, but what they see as unreasonable, they won't reinsure. Allstate (and its ilk) either take the risk themselves (fat chance) or they get someone else down the chain to pony up more dough. That translates the pain downward in the chain to the risk owners (e.g. homeowners) in a couple of possible ways--one way is that, as you note, coastal insurance may become rather expensive.

I see this as a good thing--when I was a kid and lived at the beach, all of the houses were basically pine shacks because only a fool would build a palace where a hurricane could wipe it out. Enter flood insurance subsidies and the fools rush in. Beach real estate skyrockets in price and palatial mansions go up in flood zones, because a fair portion of the risk is being born by others.

The other way it could play is that a lot of people who don't live in risky places but who swim in the same risk pool, so to speak, could end up paying more. This is also a good thing in my opinion. My earlier point is that personal monetary pain results in swifter action than moral outrage. When people who don't live in flood zones see, directly, in their insurance bill that they are bearing the cost of those who do, they'll do something about it.

We clearly disagree on whether it will play out my way or yours, Wintermane. Time will tell. As to whether its "in time" or not, my feeling is it's an incremental race (barring any tipping points, of course) so every little bit helps. It's not a single roll of the dice to win or lose.

By the way, the oil industry still runs a buttload of rigs, they just happen to be running fewer in the Gulf of Mexico, and more, say, off of West Africa. As I understand it, the reasoning was not insurability, but availability of gas and oil--basically the shallow shelf played out and that only leaves the (more expensive and risky) deepwater. Which has, actually, been fairly active. Remember that big-ass BP rig that was listing off of the coast of LA six months agon due to hurricane damage? That's where they were drilling: deepwater. The deepwater gulf has been so active that rig availability is a big problem for those involved in drilling there. I know of at least one well that was basically abandoned after Katrina trashed the platform because rigs are scarce and expensive.

Posted by: davidg on 13 Dec 05

Its both oil and gad availablity and risk. Some are leaving a fair amount of oil behind because they are limiting risk by limiting rigs in the risky areas.

They also simply arnt building as many of the rigs as before both for risk reasons and because they are gearing and have geared up for peak oil and a change from ocean drilling to sand and shale mining and coal converting.

As for the tipping point we likely already tipped we just dont see it yet.

Posted by: wintermane on 13 Dec 05



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