The Coming Storm: Global Warming and Risk Management

Article excerpt

There is little question that global climate conditions have been getting worse. Statistics from Munich Re show that, in comparison with the 1960s, five times as many natural catastrophes such as major hurricanes and tornadoes occur in a "typical" year nowadays, costing the world's economies eight times and the insurance industry 15 times as much as 40 years ago (all corrected for inflation). A record 600 catastrophes occurred in 1996, causing 12,000 deaths and $9 billion in insurance losses. And if climatic trends continue, these numbers could pale in comparison to what we can expect in the not-so-distant future.

Many experts ascribe these trends to global warming, and global warming in turn to a human-induced increase in greenhouse gas emissions. The potential consequences of this warming--whatever its causes--include more potent or frequent windstorms, increased rainfall and ensuing floods, mud slides, hailstorms, subsidence, drought, crop damage and wildfire.

Insurers and the risk management community are likely to experience early and profound effects if these predictions are accurate.

Hot Today, Hotter Tomorrow

It is undisputed that the naturally occurring level of greenhouse gases (especially carbon dioxide) provides a heat-trapping blanket in the atmosphere that makes the earth habitable. It is also agreed that human activities--primarily the burning of fossil fuels and deforestation--have contributed to a dramatic increase in the concentrations of these gases. Preindustrial-era levels have increased by a third and are expected to double within about 50 years if humans don't change their behavior.

This increase is likely to trap more heat than our current climate can tolerate. The National Oceanic and Atmospheric Administration (NOAA) recently announced that 1997 was the warmest year of the twentieth century, as were nine of the past 11 years. They note--with a 90 percent degree of statistical certainty--that this is part of a trend linked to human activities.

These temperature increases--however seemingly modest--can lead to startling consequences. The NOAA reports that a three-degree average temperature increase would result in a five-fold rise in the likelihood of killer urban heat waves. Similar studies have shown that a small increase would also result in a sharp rise in catastrophic grassland wildfires.

Using future scenarios of high and low energy demand, the Intergovernmental Panel on Climate Change (IPCC) projects that by 2050 average air temperatures will increase by about two degrees to six degrees Fahrenheit, accompanied by sea-level increases of six inches to 37 inches.

These predictions are estimates, at best; the precise effects and timing of increased global temperatures, and their geographical distribution, are not fully known. Complicating matters further, a host of complex feedbacks exist, some of which amplify the greenhouse process while others dampen it. Again, the net effect of these feedbacks is poorly understood. Another ominous possibility is what the IPCC refers to as "surprises," very rapid and hard-to-predict changes resulting from hair-trigger climate processes. (See Risk Reporter, page 8.)

These kinds of changes are not unusual when viewed on geological timescales. What is of concern, however, is the relatively fast rate of change, which would likely defy the ability of populations and ecosystems to adjust.

The Catastrophe Connection

As noted, average annual catastrophe losses have increased considerably in recent years. (See Exhibit 1.) The 19 natural disaster insurance losses exceeding $1 billion have all taken place since 1983. According to the Reinsurance Association of America (RAA), nearly 50 percent of the insured losses from natural catastrophes during the past 40 years have been incurred since 1990. The most damaging storm in the history of the insurance industry, Hurricane Andrew, led to $20 billion in insured losses, followed by rapidly increasing premiums, insurer insolvencies and the withdrawal of some insurers from the region. …