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Can the Insurance Industry Survive Climate Change?
by Francesca Rheannon
The weather just seems to be getting crazier and crazier. First, the Mississippi River caused record flooding in several communities. Now, it's the turn of communities along the Missouri River - residents in Iowa displaced by flooding may not be able to return to assess the damage for 10 weeks. Parts of Nebraska and Missouri are, as of this writing, receiving dire predictions that levees will be overtopped in the near future. One lawmaker called it a "slow-motion tsunami."
Killer tornadoes in the Midwest of the U.S. caused major loss of life (the toll is currently 141 deaths) and record damage. But when I heard the news that my home territory of western Massachusetts got clobbered by tornadoes severe enough to cause fatalities, I was really shocked - tornadoes in New England? There have been a few minor ones here and there over the years, but nothing like this.
Meanwhile, forest fires are raging in Texas, New Mexico and Arizona. Over 3 million acres have burned in the tinder-box the southwestern U.S. has become, due to a monster drought-with no end in sight. Texas Gov. Rick Perry declared a three-day period of prayer for rain, calling on divine intervention to save his state.
This is the same governor who, in 2010, challenged the EPA's finding that CO2 emissions cause global warming (a predicted contributor to the kind of severe droughts plaguing the Southwest) and thereby threaten human health. Perry said the finding was based on "flawed science" and would damage the state's economy. (The drought itself is costing the state billions, as reported by the insurance industry website, liveinsurance.com.)
But most victims of extreme weather disasters are more likely to call on their insurance companies instead of the Lord for relief. So far, homeowners in western Massachusetts have filed insurance claims totaling a record $90 million with the final number expected to rise. The claims from wildfires, floods and tornadoes are likely to set records in other parts of the country, as well. The Joplin, MO tornado alone will cost insurers an estimated $3 billion, with the total for the tornadoes that ravaged the Midwest expected to top $7 billion.
As catastrophic weather events continue to become more common and more severe due to climate change, the insurance industry will be sorely tested. 2010 insured losses were estimated at between $18 billion and $37 billion - and indicated "a probable link" to climate change, according to insurance giant, Munich Re. In fact, the industry has named climate change its biggest challenge.
But how will the industry respond? The most immediate response we are already seeing are soaring premiums to homeowners and businesses. One 2009 study predicted a doubling of insurance rates due to climate change - and that was before severe weather events doubled in 2010 from 2009 totals.
Other companies are pulling out of climate-change challenged markets altogether, as the New York Times reported. "Allstate, the largest publicly traded insurer in the United States, has reduced its exposure in hurricane-prone areas and stopped writing new homeowners policies in California altogether, because of earthquake risk. It has also trimmed back its risk from inland storms." The report quoted one Allstate executive as saying, "We're running our business as if this change...is permanent...and we need to recover those costs."
Another way of recovering costs is by limiting coverage through increased deductibles, reduced limits and novel exclusions (after Katrina, some homeowners were denied coverage when their house flooded because it was claimed the damage came from the hurricane-force winds).
Insurance may well become unaffordable for millions in the U.S. and elsewhere in the developed world as premiums skyrocket. But the problem in the developing world is that many of the world's most vulnerable victims of climate change are not insured at all. According to Swiss Re, another insurance giant, "the economic effects of current climate impacts can amount to between 2-12 percent of GDP annually. These impacts threaten to undermine national budgets of vulnerable countries for years to come." They will also undermine the ability of those societies to pay for clean, sustainable development.
While many U.S. insurance companies are responding to climate challenge by making insurance more expensive and less accessible - and even fighting the SEC on making companies disclose climate risk - European companies like Swiss Re and Munich Re see climate change as a business opportunity - and a chance to move the global needle forward on mitigation and adaptation.
Approaches can range from the relatively modest - like discounts for individuals and companies that use clean energy - to programs that create transformative innovations in the industry. One such is what is called the "parametric insurance model," such as the Caribbean Catastrophe Risk Insurance Facility (CCRIF). A public-private partnership, it is designed to get recovery funds into the hands of disaster victims quickly (via their governments)-within weeks, instead of the months or even years it can normally take. It does this by estimating payouts on the basis of the severity of the event, rather than on the individual claims process.
Swiss Re says in one company report innovative models like parametric insurance can transfer climate risks away from public budgets to the commercial insurance market, thus pre-financing disaster recovery efforts and thereby strengthening "local adaptation strategies and protecting communities against the rising costs of climate change."
In both developed countries and emerging economies, the insurance industry can play a vital role by correctly pricing climate risks, providing quantitative estimates of risk - and, last but not least, investing in adaptation and mitigation strategies. A climate conscious insurance industry is critical to driving policies that lessen the ultimate price tag of climate change - not just the insurance costs, but the costs to economies and ecosystems as a whole.
If the insurance industry is to survive climate change, it will have to adopt the adage "an ounce of prevention is worth a pound of cure" as its mission. And, as the biggest industry on the planet, it just might have the clout to save itself, and save the rest of us by doing so.
Reprinted with permission from CSRwire
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