Climate Change Takes it Toll on Insurers in 2010

Munich Re, one of the largest reinsurance companies in the world, released its annual report on natural disasters Monday. This past year was thesixth-highest in total losses for insurers since 1980 and also anindication that climate change isn’t an issue for the future, but something that needs to be addressed right now.

Total insured losses for 2010 were $37 billion compared with $22 billion in 2009. When uninsured losses are put into the mix, that number risesto $130 billion in comparison to $50 billion the year before. Theselosses don’t take into account the extreme flooding in Australia thatcame at the end of 2010.

Overall, there were 950 natural disasters in 2010. That’s well above the 10-year average of 785 events. Earthquakes in Chile and Haiti resultedin major economic damage and loss of life.

However, nine-tenths of the catastrophes were weather-related. Theseinclude the heat wave and forest fires in Russia that killed 56,000,floods in Pakistan that left 26 million homeless, and Winter StormXynthia which caused $6.1 billion in damage in Europe.

Dodging the Bullet

Insurers were lucky there weren’t more weather-related losses. 2010 wasthe third most active hurricane season of the past 100 years. In all,there were 19 named storms, 12 of which attained hurricane status. Justthree made landfall, though, with none hitting the US.

This increased activity is attributed in part to significantly warmerthan usual water temperatures in the tropical north Atlantic where moststorms form. Peter Höppe, Head of Munich Re’s Geo Risks Research Unitsaid in the past 30 years, "all ocean basins show an increase in watertemperatures. This long-term trend can no longer be explained by natural climate oscillations alone. No, the probability is that climate changeis contributing to some of the warming of the world’s oceans. Thisinfluence will increase further and, together with the continuingnatural warm phase in the North Atlantic, is likely to mean a furtherhigh level of hurricane activity in the coming years."

Climate change also likely played a role in at least some of the otherweather-related disasters. This raises an interesting academic issue ofwhat defines a "natural disaster" given human’s role in altering theclimate. A more important question is how should insurance companiesrespond?

The Role of Insurance in a Changing Climate

Insurers are in position to play a key role in adapting to climatechange. They already help individuals and businesses protect themselvesfrom climate shocks.

Unfortunately, not everyone has access to insurance. Over $90 billion in losses due to catastrophic events this year were not insured. Most ofthose losses were in developing countries. Putting the burden on theworld’s poor to not only endure the effects of climate change, but alsopay for it is incredibly unjust.

There are some smaller-scale efforts to offer insurance in developingcountries. Index insurance has been used in agricultural settings. Itsets a threshold for drought, for example, and if that threshold isreached, farmers who have a policy are paid out. Other microlendingprograms have also had some success in insulating low-income people from climate shocks.

However, in the face of climate change, these efforts need to be scaledup so people in developing countries can take full advantage of them.Large insurance companies could help underwrite more of these policiesto get the ball rolling.

Insurance companies are also in a unique position to incentivizemitigation. Some companies already do this. Farmers’ Insurance offersdiscounted rates on hybrid vehicles where state law permits. Offeringdiscounts for hybrids is just the tip of the iceberg, though. Insurerscould also cut rates for individuals or institutions that purchase zeroemissions energy.

It would behoove insurance companies to consider unique mechanisms toinfluence mitigation sooner than later. A 2005 report put out by theAssociation of British Insurers shows what would happen if emissionsincrease unabated.

According to the Intergovernmental Panel on Climate Change’s estimates,this would put atmospheric carbon dioxide concentrations at 810 partsper million (ppm) by 2080. This would result in losses that would befive to eight times higher than if emissions were stabilized so thatatmospheric carbon dioxide levels were 525 ppm.

Climate change is a game of probabilities. The stakes are already high for bothinsurance company profits and the people being directly affected byextreme events. It’s in both sides’ best interests to make headwaymitigating and adapting before the stakes become astronomical.

Photo credit: alancleaver_2000

Original Article on Justmeans


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