Storm Warnings: Climate Change Hits the Insurance Industry

Article excerpt

Staggered by an unprecedented series of hurricanes, floods, and fires, insurers are weighing the possibility that these catastrophes are the first real effects of human-induced climate change--and that the worst is yet to come. Their response could pit them squarely against the giant fossil fuel industry in the battle over reducing carbon emissions.

During 1993, a series of headlines in major newspapers described an insurance industry in crisis, as weather-related disasters led to billions of dollars in insurance claims. "Storm Loss New Blow to Insurers," proclaimed The New York Times. "As Insurance Costs from Hurricanes Soar, Higher Rates Loom," warned The Wall Street Journal. And London's Financial Times offered a succinct explanation: "Global Warming Makes Insurers Sweat."

The headlines were hardly an exaggeration. Between September 1989 and September 1994, the world experienced at least 15 separate weather-related disasters in which financial losses exceeded $1 billion. Among the events that created the greatest alarms were Hurricane Andrew, the most damaging storm in U.S. history; several huge cyclonic storms in Asia; a series of ravaging wind storms in northern Europe; two enormously destructive fires in California; and the worst flood ever seen on the Mississippi River.

The very term "natural disaster" suggests that this litany of financial losses should be written off as a bizarre coincidence we can do little about. But a growing body of scientists, as well as experts within the insurance industry itself, are beginning to consider the possibility that human society is not only a victim of climatic events, but a causal agent as well.

In some ways this is inarguable. Coastal housing developments, levees that alter flood plains, and fire suppression programs that allow the buildup of combustible materials all contribute to the frequency or severity of weather-related disasters. But such actions merely increase vulnerability to incidents of extreme weather, once they occur. On a more profound level, scientific evidence now points to the possibility that human-induced changes to the atmosphere may increase the frequency or severity of the incidents themselves--including hurricanes, droughts, and wild fires.

It is too early to know for sure if the recent spate of disasters is related to the ongoing buildup of greenhouse gases in the atmosphere. But people in the insurance industry are looking at the question closely, since their entire business is founded on historically based probability calculations that would have to be overhauled if insurers are no longer able to assume that weather in the future will be similar to past weather. Indeed, a suddenly less stable, more extreme climate could make the world's insurance companies as vulnerable as the flimsiest Caribbean bungalow.

Franklin Nutter, President of the Reinsurance Association of America, sums up his industry's dilemma this way: "The insurance business is first in line to be affected by climate could bankrupt the industry."

The entry of the $1.4 trillion-a-year insurance industry into the debate over global climate change could mark a watershed. Even as national governments and international agencies have begun to focus on strategies to reduce greenhouse gas emissions, public discussions have been shaped in part by the voices of skeptics who argue that because we cannot fully predict the timing or magnitude of climate change, policy responses should be delayed.

To insurance executives, however, this is a strange argument, since all of their business--indeed, its very nature--involves making important investment decisions in the face of large uncertainties. Indeed, they have effective tools for quantifying the financial risk involved in possible future disasters--even if the probability of a particular event is small. To an insurance executive, the very uncertainties associated with climate change may be the best reason for taking it seriously. …