Climate Change and Storm Damage: The Insurance Costs Keep Rising

Article excerpt

In the article "Storm Warnings," in our November/December 1994 issue, we noted a striking development in the escalating debate over global climate change: the growing concern of the insurance industry.

By the time we ran that story, many atmospheric scientists had already reached a consensus that increases in the concentration of greenhouse gases would raise the average temperature of the earth's atmosphere. Since then, evidence of human-induced climate change has been confirmed, and several scientific studies found that this warming may already be increasing the frequency and severity of storms and other weather disturbances.

Insurance companies, which have to pay for much of the damage caused by such "improbable" events as 100-year storms that occur three or four times in a decade, had taken heavy losses from such events in the early 1990s and were suddenly realizing their vulnerability to climate change, according to our 1994 article. We quoted Franklin Nutter, President of the Reinsurance Association of America, who said: "The insurance business is first in line to be affected by climate change....[It] could bankrupt the industry." One implication of our story was that the insurance industry might throw its considerable weight - and experience in the management of risk - into the battle to cut back human-caused carbon emissions.

In the more than two years since the article appeared, insurance industry worries about this problem have continued to grow. In fact, worldwide weather-related financial losses (not all of them insured) reached a new high of $38 billion in 1995, continuing a string of disaster-prone years in the 1990s (see graph). In the first half of the decade, insurers paid out $57 billion for weather-related losses worldwide, compared with $17 billion for the entire decade of the 1980s.

The weather disasters of 1995 included Hurricane Opal, which cost $3 billion in the southeastern United States, winter floods in Europe that cost $3.5 billion, flooding in southern China that cost $6.7 billion, and floods in North Korea that cost $15 billion and left millions of people on the brink of starvation. The insurance industry was spared the full brunt of these last two disasters only because neither China nor North Korea have much insurance - which leaves businesses and individuals there even more vulnerable to disaster.

Although complete figures for 1996 are not yet in, it appears to have been another bad weather year. Flooding in southern China was even more severe than that of 1995, causing $26 billion in damages and killing more than 3,000 people. …