Insurance Community Concerns Mount Over Climate Change Debate

To paraphrase an old adage: “Nothing concentrates the overall mind of the property/casualty insurance community as much as the approaching certainty of large loss events.” So, it’s no wonder that many prestigious industry names are in the vanguard of efforts to focus world concerns on climate change, global warming and their link to human-caused atmospheric pollution in the form of increased greenhouse gas emissions.

Are their fears justified? The United Nations Environment Program (UNEP) and the Intergovernmental Panel on Climate Change (IPCC) certainly think so.

UNEP sums up the problem as follows: “Scientists have documented climate-change induced changes in some 100 physical and 450 biological processes. In the Russian Arctic, higher temperatures are melting the permafrost, causing the foundations of five-story apartment buildings to slump. Worldwide, the rain, is often more intense. Floods and storms are more severe, and heat waves are becoming more extreme. Rivers freeze later in the winter and melt earlier. Trees flower earlier in spring, insects emerge faster and birds lay eggs sooner. Glaciers are melting. The global mean sea level is rising. The rate of climate change expected over the next 100 years is unprecedented in human history.”

No one seriously disputes that the climate is changing, but many experts point out that global climates and accompanying weather patterns are never stable, but change naturally over time. While that is an acknowledged fact, the evidence continues to build that the current cycle of climate change is more radical, is happening more quickly and will have more disastrous consequences than has previously been the case.

As the Kyoto protocol was coming into force last February researchers at the Scripps Institution of Oceanography at the University of California, San Diego, and their colleagues produced the first clear scientific evidence that human activity–and very little else–is warming the world’s oceans, which in turn determine world weather patterns (See IJ March 7).

Tim Barnett, a marine physicist in the Climate Research Division at Scripps revealed the findings at the annual Conference of the American Association for the Advancement of Science.

“This is perhaps the most compelling evidence yet that global warming is happening right now and it shows that we can successfully simulate its past and likely future evolution,” he stated. The computer models reproduced the penetration of the warming signal in all the world’s oceans. “The statistical significance of these results is far too strong to be merely dismissed and should wipe out much of the uncertainty about the reality of global warming,” he continued.

When asked about the link, Dr. Eberharde Faust, a member of Munich Re’s Geo Risk Research Unit who heads its work on climate change, explained how it works, using Atlantic hurricanes as an example. The Atlantic Ocean between 10° and 20° North, where tropical cyclones develop, is now in a “warm phase.” The last such period ended in the 1970s. He described them as “circular modes,” which aren’t in fact related to global warming, but, he added that warmer global temperatures make the warm phases warmer and longer, and the cold phases shorter and less cold. This increases the number and severity of the storms.

Another Munich Re climate expert, Thomas Loster, told delegates at the Climate Change Convention held in Buenos Aires in December 2004: “As in 2002 and 2003, the overall balance of natural catastrophes is again clearly dominated by weather-related disasters, many of them exceptional and extreme.” He noted that insured losses for the first 10 months of 2004 were $35 billion, $26 billion in the U.S. alone, making it the most costly year ever for the industry.

Since those developments, the case for connecting mankind’s activities to global warming–and the consequent increase in violent and costly weather related events–has mounted. Almost simultaneous announcements in June from Germany’s Allianz and the Association of British Insurers (ABI) both stressed the reality of the threat and the need to take remedial measures to reduce it.

Joachim Faber, a member of the Allianz Board of Management told interviewers on the company’s Website: “We expect climate change to influence the frequency and severity of natural catastrophes. This means, for example, more property damage which of course will affect our insurance business.”

Allianz also foresees increasing potential losses from property damage claims, with a consequent rise in premiums “to cover the risks associated with climate change.” Andrew Torrance, CEO of Allianz Cornhill, the Group’s U.K.-based insurance subsidiary, noted: “We agree with scientists who say that while natural catastrophes can not be conclusively linked to climate change, the severity and frequency of natural disasters have increased as a result of a changing climate. For our insurance business, climate change is increasing the potential of property damage at a rate of 2 to 4 percent per year. In some cases this might result in property damage premium rises in some markets as insurers adjust their risk-based insurance cost models to reflect the increasing severity of climate change events.”

The ABI’s report, “Financial Risks of Climate Change,” based on international scientific research, much of it supplied by AIR Worldwide and RMS, predicts that the worldwide costs of major storms is likely to increase by as much as two-thirds raising the total cost in an average year to $27 billion.

It calls for government action to ameliorate the potentially devastating impact of severe weather. Timed to coincide with the gathering of the G8 Summit, held at Gleneagles near Edinburgh in Scotland July 6-8, the ABI asked world leaders to take action on the following items: “Reduce carbon emissions. This could save up to 80 percent of the predicted extra costs; continue to improve coastal defenses and flood protection inland, and change building codes to ensure more weather-resilient buildings.” Coming just after flash floods raged through North Yorkshire causing heavy property damage (but no loss of life), the demands had a special urgency.

The ABI cited the climate change scenarios modeled by the IPCC, indicating that “if no action were taken,” the world could expect “the following financial effects by 2080:” The cost of insured damage in a severe hurricane season in the United States could rise by three-quarters to $150 billion, an increase equivalent to almost three Hurricane Andrews. The costs of Japanese typhoons could increase by around two-thirds to $34 billion, double the cost of typhoon damage in 2004, which was the costliest year in the last 100 years. The financial costs of flooding could rise in both the U.K. and the rest of Europe, increasing the annual flood bill by up to $145 billion. Insurance markets could become more volatile. The capital needed by insurers to cover severe storms could rise by $78 billion, with increases of 90 percent for U.S. hurricanes and 80 percent for Japanese typhoons.

However the ABI’s study also concluded that many of these costs could be avoided if action were taken now. Reducing global carbon emissions could reduce the size of insurers’ increased capital requirements for hurricanes, typhoons and windstorms by more than $60 billion based on the IPCC scenarios. Strong, well-enforced building codes could prevent and reduce windstorm damage. Improved coastal defenses could reduce the global annual damage from a 0.5 meter (1.5 feet) rise in sea level by up to $30 billion. In the U.K., effective flood management could save 80 percent of the costs of flood damage.

Many experts in the U.S. don’t seem to be as convinced as their European counterparts of the role played by greenhouse gasses in increasing global warming. AIR Worldwide’s Dr. Jayanta Guin, vice president of research and modeling, who headed the team that helped produce the ABI study, noted: “The causes and effects of climate change are still the subject of much debate within the scientific community. While there are certainly ways in which global warming could potentially affect the frequency and severity of tropical and extratropical cyclones, there is still no scientific consensus on what the impact will be. What is clear, however, is that the relatively small increase in average wind speeds predicted by some scientists would produce a significant increase in insured losses.”

The BBC reported that “to an outsider, the argument on the environment in America doesn’t seem as focused as it does in other parts of the world.” True, the U.S. differs from Europe in many ways, but it undeniably faces increased threats from droughts, floods, hurricanes, tornadoes, blizzards and the loss of life and property damage they cause.

Those within the insurance industry who’ve issued warnings on the effect of climate change are respected scientists, business executives and engineers who are convinced from the evidence they’ve studied that there is a real problem. In their view taking necessary measures now could eventually save thousands of lives and billions of dollars.

President Bush’s recent statements that the issue was one “we’ve got to deal with” and that human activity was “to some extent to blame,” show that perhaps the message is finally getting through, but his solutions do not go far enough.

A White House press release, which says the U.S. is committed to reducing “greenhouse gas intensity”–how much it emits per unit of economic activity–by 18 percent in 2005 is hardly believable. The President continues to reject adopting the Kyoto Protocol on the grounds that its restrictions on greenhouse gas emissions would adversely affect the U.S. economy. How much adverse economic effect would three Hurricane Andrews have? Oh, but then those losses would be paid by the insurance industry, wouldn’t they? Maybe that’s why they’re concerned about climate change.

Topics Catastrophe USA Europe Flood Property Hurricane Climate Change Allianz