Insurers Are Deeply Worried about Climate Change. More Disasters like Hurricane Katrina Could Raise Premiums Dramatically and Render Some of the World Uninsurable. That Would Have Consequences for Everyone

By Verrall, Richard | European Business Forum, Winter 2006 | Go to article overview

Insurers Are Deeply Worried about Climate Change. More Disasters like Hurricane Katrina Could Raise Premiums Dramatically and Render Some of the World Uninsurable. That Would Have Consequences for Everyone


Verrall, Richard, European Business Forum


Businesses around the globe are beginning to wake up to the potential impact of climate change. But for one industry-insurance-global warming is already a reality.

As the first effects become clear, insurers are changing the way they assess risks and some are predicting that many areas of the world will soon become uninsurable.

At Cass, we have been researching methods for measuring and managing climate change risk. Over the past few months, we have developed models that provide some insight into the specific financial implications.

Until recently, opinion was divided over the impact of climate change on global weather patterns. The lack of unequivocal scientific data left plenty of room for conjecture. But in the past two years firm evidence has been accumlating. The 1990s was the warmest decade for more than 1,000 years and the levels of CO2 are now at their highest for 650,000 years. Last year's North Atlantic hurricane season was the most destructive since records began. In Hurricane Katrina, the insurance industry suffered its biggest ever loss. Swiss Re estimates Katrina's windstorm and tidal surge damage at $45bn-more than twice the estimated $20.7bn claims resulting from the World Trade Center attacks in 2001.

Rising sea temperatures play a pivotal role in the formation of hurricanes and typhoons, and overall sea surface temperatures have risen by between 0.2[degrees]C and 0.6[degrees]C over the past century.

Scientists predict that we can expect severe hurricane activity for at least the next 20 years, based on the natural cycle of events, let alone the impact that climate change may have on weather patterns.

A study by the Association of British Insurers predicts that climate change could increase the annual costs of flooding in the UK almost 15-fold by 2080. It says weather-related losses from extreme natural catastrophes could increase to between $100bn and $150bn a year by the same date.

New models

Traditionally the insurance industry has relied on historical data to model its long-term exposures to natural disasters. But, after the events of 2005, underwriters have been looking at new methods. There remains a lack of hard evidence on the future impact of climate change, but there is a wealth of data about recent losses. The industry has therefore begun modelling its exposures using events that normally would be once-in-150-year occurrences. That has increased premiums dramatically. In the past, the industry has relied on expert underwriting knowledge as part of those calculations, but increasingly it is the loss data collected from recent extreme events that is paramount. …

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