The insurance industry and climate change

The impact of climate on the insurance industry is mainly through extreme weather events. In developing countries there may be very high mortality from extreme weather but relatively small costs to the industry because of low insurance penetration. In developed countries the loss of life may be much less but the costs to the insurance industry can be very large. Figure 1.2 illustrates the large growth in weather-related disasters and the associated economic and insured losses since the 1950s and Table 7.3 the distribution of the disasters, fatalities and economic losses from 1985 to 1999 around the continents. Some idea of the types of disaster that cause the largest economic loss can be gleaned from Table 7.4.

Part of the observed upward trend in historical disaster losses is linked to socio-economic factors such as population growth, increased wealth and urbanisation in vulnerable areas; part is linked to climatic factors such as changes in precipitation, flooding and drought events. There are differences in balance between the causes by region and type of event. Because of the complexities involved in delineating both the socio-economic and the climatic factors, the proportion of the contribution from human-induced

Table 7.4 Individual events included in the aggregates in Table 7.3 that incurred over $US5 billion of economic loss and over $US1 billion of insured loss

Year

Event

Area

Economic losses (billion $US)

Ratio: insured/ economic losses

1995

Earthquake

Japan

112.1

0.03

1994

Northridge Earthquake

USA

50.6

0.35

1992

Hurricane Andrew

USA

36.6

0.57

1998

Floods

China

30.9

0.03

1993

Floods

USA

18.6

0.06

1991

Typhoon Mireille

Japan

12.7

0.54

1989

Hurricane Hugo

Caribbean, USA

12.7

0.50

1999

Winterstorm Lothar

Europe

11.1

0.53

1998

Hurricane Georges

Caribbean, USA

10.3

0.34

1990

Winterstorm Daria

Europe

9.1

0.75

1993

Blizzard

USA

5.8

0.34

1996

Hurricane Fran

USA

5.7

0.32

1987

Winterstorm

W. Europe

5.6

0.84

1999

Typhoon Bart

Japan

5.0

0.60

climate change cannot be defined with any certainty - although it is interesting to note that the growth rate in damage cost of weather-related events was three times that of non-weather-related events for the period 1960-99.

Recent history has shown that weather-related losses can stress insurers to the point of bankruptcy. Hurricane Andrew in 1992 broke the $US20 billion barrier for insured loss and served as a wake-up call to the industry. Hurricane Katrina in 2005 that had been a Category 5 storm but weakened to a Category 3 before landfall caused a storm surge, supplemented by waves that reached around 5 m above sea level in the city of New Orleans, overtopping and breaching sections of the city's sea defences, flooding 70-80% of New Orleans. Well over 1000 people died, private insurance claims in excess of $US40 billion were made and total economic losses are estimated to be over $US100 billion or around 1% of US annual GDP.69 Katrina was the costliest hurricane ever in terms of economic damage. Other records regarding Atlantic hurricanes were also broken in 2005,70 the most hurricanes (13), strongest ever (Wilma) and costliest in total ($US200 billion +).

As a result of such events, in many flood-prone areas insurance premiums have risen dramatically and for many properties insurance flood cover has been withdrawn. In order to formulate their future business policy, the insurance industry is actively studying likely future trends in the incidence of disasters due to climate change along with related socio-economic trends in both the developed and the developing world.

weather-related extreme events, then multiplying by two to allow for the factors mentioned above (e.g. associated or knock-on costs) and further multiplying by four to allow for the likely increase in extreme events, say by the middle of the twenty-first century, we end up with a figure of about 2% of GDP. This can be compared with an estimate of 0.5-1% in the Stern Review on the economics of climate change of 2006,68 where a much smaller increase was assumed in the risk of extreme events. However the Stern Review emphasises that a steeper rise is likely later in the century because of the steep rise in the incidence of extremes as global average temperature increases even more. Further, my estimate here and those in the Stern review are 'money' estimates made in the context of developed countries' economies. As the Stern Review also points out, the real total costs of extreme events taking into account all damages (including those that cannot be expressed in money terms) are likely to be very much larger especially in many developing countries.

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