Insurance industry facing a climate of fear – ‘Many of the risks posed by climate change will become uninsurable’

By Peter Huck
27 June 2011 This month, as the US reeled from some very nasty weather – floods in Mississippi, drought in Texas, tornadoes in the Midwest – the New York Times got right down to brass tacks: given damage to property, crops and lost business, how much would insurers have to fork out? Ten billion dollars and counting seemed a safe bet. “There’s no question it’s above average,” says David Smith, a senior vice president with US company Eqecat, which uses modelling to advise the insurance industry on catastrophe risk management. “An average annual loss for severe convective storms – tornadoes, hail, thunderstorms and wind – is about US$6 billion. ($7.4 billion). We’ll certainly end the year above that.” Indeed. Add in damage from February’s monster blizzard, which shut down much of the Midwest; an “unseasonable” heatwave, dramatised by Arizona’s largest wildfire; and, since June 1, a hurricane season the National Oceanic and Atmospheric Administration predicts will be “above-average”, and payouts in the US may set records. For an industry whose survival means managing risk, these are challenging times. […] The World Meteorological Organisation ranked last year, 2005 and 1998 as the warmest years ever recorded, confirming a “significant long-term warming trend”. […] For those in the risk management business, simply denying climate change is not an option. Increasingly, the insurance industry is showing the way forward. It involves tough calls to protect the bottom line: dumping customers with properties on floodplains, or in hurricane-prone areas, while insuring “green” technologies that offer the best chance of slowing warming and protecting investments. Despite “tremendous uncertainties” in scientific modelling of hurricanes and typhoons, Smith says there is a growing industry consensus that the warming climate is amplifying precipitation and floods. He believes some “very significant changes” lie down the road. Insurers face three big questions. How soon? How much? And how to respond? […] Evan Mills, a staff scientist at the Lawrence Berkeley National Laboratory and IPCC member who writes about insurance, says weather-related losses, which account for about 90 per cent of all natural disasters, total US$80 billion a year worldwide, of which US$20 billion is insured. Adjusted for inflation, international economic losses from weather-related events rose eight-fold, and insured losses 17-fold, between the 1960s and the 1990s. The IPCC believes those losses are understated, as in the US “small” events under $25 million in insured losses are excluded from the tally of natural disasters. German reinsurer Munich Re, which publicly noted concern about climate change way back in 1973, has logged 28,000 events since 1950. The industry’s biggest disaster database notes losses from weather-related catastrophes rose “by a factor of three” from 1980 to 2009, from some 133 events a year in the 1980s to over 350 a year today. Figures compiled by the Insurance Council of New Zealand from 1968 to January 2011, excluding the 2010 Christchurch quake, show a similar trajectory: during the 1990s 36 natural disasters cost $214 million, rising in the noughties to 57 episodes costing some $630 million. Recent natural disasters in Australasia alone, excluding Cyclone Yasi and the 2011 Christchurch quakes, cost the industry up to $15.8 billion according to a Munich Re March estimate. “Aggregate losses from weather-related natural catastrophes since 1980 now total US$1600 billion, with insured losses increasing on average by 11 per cent each year,” says Munich Re’s media chief Nikola Kemper. And while she cautions that this rise is partly driven by higher property values and more people living in vulnerable floodplains and seashores, “it would seem that the growing number of weather-related catastrophes can only be explained by climate change”. […] For a taste of what the insurance industry’s changing attitudes can mean, take a look at the US. Of the 3 million American homes denied insurance between 2003 and 2007, only half found new coverage. Allstate, one of the major US insurers, said climate change prompted it to cancel or not renew policies in many Gulf Coast states. The trend spread along America’s hurricane-prone Southeastern seaboard. Florida’s biggest private insurer, State Farm, stopped writing policies and quit Mississippi altogether. In 2008 Farmers Insurance stopped writing policies for North Carolina and refused to renew existing ones, forgoing US$55 million in annual premiums because of the risk of losses. Elsewhere, premiums increased by 42 per cent to 77 per cent in nine Southern states between 2001 and 2006. […] “Many of the risks posed by climate change will become uninsurable,” predicts Mills. […]

Insurance industry facing a climate of fear via The Oil Drum