Magazine article Risk Management

Threat Level Rising: The Insurance Industry Responds to Climate Change Risk

Magazine article Risk Management

Threat Level Rising: The Insurance Industry Responds to Climate Change Risk

Article excerpt

IN THE HALLS OF CONGRESS, CLIMATE CHANGE AND ITS INFLUENCE ON PUBLIC POLICY CONTINUE TO BE THE SUBJECT OF INTENSE DEBATE. FOR INSURERS AND REINSURERS, HOWEVER, THIS DEBATE IS QUICKLY BECOMING IRRELEVANT AS THE POTENTIALLY CATASTROPHIC THREATS BROUGHT ON BY A CHANGING CLIMATE INCREASINGLY DEMAND TAKING THE SUBJECT VERY SERIOUSLY.

Insurers and reinsurers have been looking at global climate change for some time now. In a 1014 Sigma report on natural catastrophes and other disasters, Swiss Re stated, "Climate change is widely acknowledged to be caused by greenhouse gas emissions from human activity, and could lead to increasing frequency and intensity of extreme weather events. According to the Stern Review on the Economics of Climate Change, if left unchecked, the cost of climate change could increase to around 20% of global GDP by the end of this century. Dealing with climate change requires a reduction in greenhouse gas emissions alongside an integrated approach to disaster risk management."

Recent findings show that such concerns are warranted. In a January report, the National Oceanic and Atmospheric Administration (NOAA) said that 2014 was the hottest year since record keeping began in 1880, breaking records set in 2005 and 2010. The average temperature across global land and ocean surfaces was 1.24[degrees]F (0.69[degrees]C) above the 20th century average. May, June, August, September, October and December all broke temperature records for their respective months. This also marks the 38th consecutive year that the annual global temperature was above average. Including 2014, nine of the 10 warmest years in NOAA's 135-year period of record have occurred in the 21st century.

In response to the warming trend, the Obama administration announced a program of executive actions designed to reduce carbon pollution by setting emission standards for U.S. power plants and to inform the public about the dangers of inaction.

"It is an economic imperative to invest in mitigating the effects of greenhouse gases to slow the pace of climate change and achieve a long-term reduction in the economic impact from adaptation costs and losses," said Carl Hedde, head of risk accumulation for Munich Re America. "Munich Re's NatCatSERVICE database shows that the number of loss-relevant, weather-related natural catastrophes worldwide has almost tripled since 1980. This cannot be attributed to climate change alone, but we do think that the warming climate--depending on region and peril concerned--does play a certain role. Finding ways to create broader community resilience against extreme weather events is critical."

Hedde pointed out that the insurance industry is squarely in the crosshairs of a changing climate. "The insurance industry and its customers are directly affected by the increasing costs of severe weather, and must work in partnership with government agencies to drive mitigation and adaptation efforts," he said. "Our industry helps individuals and communities rebuild their lives after extreme events, while federal, state and local governments provide post-event subsidies in the form of disaster assistance. We must do more to fortify structures before an event and improve our national infrastructure if America is to remain a global leader and thrive in an increasingly severe weather environment and an increasingly competitive world."

As a result, risk modeling has drawn a great deal of interest, particularly as technology and software become increasingly sophisticated, allowing flooding and other phenomena linked to climate change to be examined in much greater detail.

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"Risk modeling has become more comprehensive and refined as significantly more data is added to the models from new events," Hedde said. "With each extreme weather event, we gather additional data and test how well the models perform. This new data and increased computing power have allowed the industry to take a more granular view of risks and to model very specific events. …

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