Disaster Losses Lead Insurers to Global Warming Debate
As head of the “geo risks” division at Munich Re, the world’s largest insurer of insurance companies, Peter Hoeppe sizes up the threat of tropical cyclones, floods and tsunamis like a Las Vegas oddsmaker tries to pick the winner of the Super Bowl.
And increasingly, Hoeppe’s biggest worry is not when the fabled big one will shake California, or the next Hurricane Andrew will steamroll Florida. It’s global warming, which he believes is already costing the $3-trillion insurance industry.
Worldwide disaster losses have been rising for the last half a century, even when inflation is factored in -- and Munich Re asserts that climate change is at least partly to blame.
Insured disaster losses in 2004 totaled $44 billion, the most expensive year ever for the industry, according to the German reinsurance company. Overall disaster losses were $114.5 billion, the second-highest total ever.
By contrast, disaster losses, adjusted to 2004 values, were about $40 billion in 1980 and $10.5 billion in 1951.
“Single events can never prove climate change. But like a stone in a mosaic, if you get enough of them, you begin to see a full picture,” said Hoeppe, who leads a team of 25 meteorologists, hydrologists, geologists and economists that studies the global cost of calamity. “We have seen dramatic increases in damage from weather events. Something is changing in the atmosphere. There is no other explanation.”
Skeptics, including some climate scientists who believe in global warming, wonder whether some insurers are talking up the threat of climate change to raise rates. And most American insurers are more concerned about terrorism than the weather.
Nevertheless, although most insurers do not believe that climate change is currently eroding their bottom line, many are growing concerned that it could in years to come if computer predictions prove correct and extreme weather becomes more common in a warmer world heated by greenhouse gases.
Last week, for example, the Assn. of British Insurers, a trade group representing about 400 companies, predicted that the worldwide cost of major storms could rise by as much as two-thirds by 2080 because of global warming, raising average annual losses to $27 billion in current dollars.
As a result, insurance companies are watching the evolving science of climate change more closely, because it could mean that their techniques for judging disaster risks based on historical trends will no longer be reliable. The concern is especially strong in the reinsurance sector, which is liable for the insurance industry’s biggest risks.
Already, some insurers contend that past no longer serves as prologue when it comes to predicting disasters.
As an example of the uncertainty they face, several insurance officials noted that a tropical storm hit Brazil’s southern coast last year, causing widespread damage; it was said to be the first hurricane ever recorded in the Atlantic Ocean south of the equator, which previously lacked the combustible mix of atmospheric conditions needed to create such potent storms.
“You cannot use the past to foretell the future. It is simply not working anymore,” said Gerry Lemcke, a climatologist with Swiss Re, the world’s second-biggest reinsurance company. “It’s very difficult to assign a number to climate change in an insurance sense. But if we want to be around after the big event -- if we want our clients to be around -- then we have to discuss these considerations.”
Such a discussion would have to include an alternative explanation for the rise in global insurance losses in the last 50 years, said Roger Pielke Jr., director of the University of Colorado’s Center for Science and Technology Policy Research: More people are living in harm’s way.
On his blog, as well as in a series of scientific papers and an article he coauthored in the New Republic, Pielke has contended that reinsurers’ claims about global warming have been accepted without scrutiny by the United Nations, environmentalists and others who would never, by comparison, take the word of the fossil fuels industry.
“It seems like pointing out the obvious that the reinsurance industry has a powerful vested interest in charging the highest rates that the market will bear for its products. And the prospect of more disasters means a basis for charging higher rates,” Pielke wrote on his blog, Prometheus.
Pielke said in an interview that although rising temperatures might indeed be having an effect on insurance losses, population shifts and the accumulation of wealth “are so great that any climate change signature is dwarfed by the other factors.”
Hoeppe of Munich Re disagrees, contending that although those trends surely account for much of the increase, they cannot explain it all.
Andrew Dlugolecki, a former insurance executive who wrote a report on the “changing climate” of the industry last year for the Assn. of British Insurers, said that companies could profit from awareness of the issue. But he said that unless insurers could adjust their premiums to match the uncertainties they see, they eventually might stop offering some types of coverage, such as insurance to oceanfront properties that might be vulnerable to rising sea levels.
“The real issue is that some things may become uninsurable in the future, which would become a big problem for other industries, including the financial industry,” Dlugolecki said. “They want to provide loans on the basis that property losses will be insured. If those losses are not going to be insured, they may not want to provide the loans.”
Although many European insurers have become believers in climate change and have begun advocating for reductions in greenhouse gases to offset the possible effects, American companies generally have adopted a wait-and-see stance. The contrast, insurance experts said, reflects the differences in the way global warming is regarded by politicians and the public on the two sides of the Atlantic.
Fid Norton, a Harvard-trained scientist who works as a risk manager for GE Insurance Solutions in Kansas City, Mo., says he closely monitors research on global warming. But he remains unconvinced that it has played any role in the rise in insurance losses.
“We recognize what science is saying, but think it is premature to draw any quantitative conclusions about climate changes and issues such as hurricane frequency and intensity,” he said.
Most hurricane experts agree. Although global warming theoretically could lead to stronger and more common storms, all events to date in the U.S. -- including the succession of hurricanes that hit Florida last year -- have a precedent in the last 150 years. Four hurricanes also made landfall in the U.S. in 1985.
“If you try to drive up someone’s rates based on climate change, they will surely ask, what can you show me in the historical record to justify the statement that climate change is a proven threat?” said Rick Murnane, manager of the Risk Prediction Initiative, a hurricane research venture funded by insurers in Bermuda. “The climate change models are simply not good enough to be believed.”
Attempts to connect recent hurricane activity to climate change have riled some hurricane scientists, who complain that environmental groups, insurance companies and even some fellow scientists have made unsupported claims.
“If you believe in climate change and its impacts, you tend to label everything an outgrowth of climate change,” said Robert Muir-Wood, chief research officer of Risk Management Solutions, a consulting firm that employs more than 100 engineers and scientists to develop computer models on the risks of terrorism and natural disasters. “That tends to make me -- a fairly skeptical scientist -- a little irate.”
But Muir-Wood, along with many other scientists, believes the 2003 heat wave that helped cause more than 20,000 deaths in Europe may have been a manifestation of climate change.
That summer, believed to be the hottest to hit Europe in half a millennium, also triggered forest fires and crop losses and led some insurers to conclude that global warming may have more ramifications than they realized.
At Harvard University’s Center for Health and the Global Environment, scientists funded by Swiss Re are studying how rising temperatures could spread diseases such as West Nile virus and allergens such as ragweed pollen, driving up costs for the health and life insurance industries.
They also are examining whether ecosystem changes caused by warming could have major economic effects -- how collapsing coral reefs could leave oceanfront hotels prone to damage from tidal waves, for example, while bark beetle infestations could turn timberlands into tinderboxes.
Extreme weather may be the most sensational consequence of global warming, but scientists say that for insurers, it may not be the worst. Sudden changes caused by global warming, such as disease and pestilence, could have more long-lasting effect.
“We have not really appreciated how climate change could have some of these effects,” said Paul R. Epstein, the Harvard Medical School instructor heading the study. “It may sound alarmist, but what is being discussed increasingly is the potential for surprises and nonlinear events. Things are changing faster than we thought.”
