Managing The Risk From Climate Change

Whether it is the dry desert heat of El Paso or the humid sauna of Houston, people who grew up in Texas know that its summers are naturally hot. For people in Dallas, last summer was no exception. After 44 days in the triple digits, the temperature in Dallas finally dipped to 94 degrees on Sept. 6, 2000. This record-breaking heat wave was responsible for wildfires, agricultural losses of $600 million and at least 45 deaths. Some state officials were concerned about how the heat wave and its negative publicity might affect tourism, which is the state’s third largest industry at $35 billion a year.

According to many climatologists, weather events like the Texas heat wave of the summer of 2000 are likely to become more frequent as the climate warms. Scientists believe that one of the potential impacts of global warming is more dramatic weather, such as more frequent heat waves and storms.

Severe weather events caused a combined total of $18.2 billion in claims to insurance companies in 1998 and 1999. Future losses may dwarf even the record losses of the 1990s. Data from A.M. Best Co., an insurance rating company, indicates that global warming could cause catastrophes that would cost insurers $100 billion, reportedly equal to the total value of the capital and surpluses of the world’s top 25 global reinsurers.

The threat of climate change presents an interesting situation for the insurance industry. Climate change represents another risk to be dealt with, as well as a possible opportunity to make customers aware of the possibility of losses and aid them in protecting themselves.

The climate system
The Earth’s climate system is thought to be changing, and many scientists believe that the change is happening at least partly because human activities are altering the concentration of gases of the atmosphere. Although greenhouse gases such as carbon dioxide occur naturally in the atmosphere, the ambient concentrations of some of those heat-trapping gases have increased significantly. Carbon dioxide levels have increased by 30 percent since the beginning of the Industrial Revolution. Carbon dioxide is released during the combustion of fossil fuels to power our homes, factories and automobiles.

Although there is uncertainty about exactly how and when the Earth’s climate will respond to enhanced concentrations of carbon dioxide and other “greenhouse gases,” observations indicate that detectable changes already may be underway. Over the last century, the average global surface temperature has risen 1 degree Fahrenheit. That is a large increase when one considers that the world is only 5 to 9 degrees warmer now than it was during the last ice age.

The nine warmest years in this century all have occurred over the last 14 years. Other changes are indicative of a warming climate: Sea levels already have risen 4-10 inches in the past century, snow cover in the Northern Hemisphere has decreased, Arctic Sea ice also has declined, and alpine glaciers worldwide are melting.

Future changes may include higher temperatures, further changes in precipitation, soil moisture, and further sea level rise due to melting ice and thermal expansion. These changes could have adverse effects on many ecological systems, as well as on human health and the economy.

The risks
There are a number of risks associated with a changing climate, many of which can affect insurers, as well as their clients. Climate change could lead to an increase in losses for the insurance industry, including property and casualty claims from more extreme hurricanes, increased flooding, weather-related crop failure and human health impacts.

Homeowners along the Texas coast between Houston and Galveston, along with those in other coastal areas, may be vulnerable to flooding from storms as well as sea-level rise. Western regions of the United States may be threatened by severe flooding as precipitation patterns change.

Businesses also may need greater protection from the threats of climate change. Agribusinesses are likely to be at higher risk for crop failure, insect pests and drought. The skiing industry is so vulnerable to climatic changes that some ski areas protect themselves from decreased snow cover by purchasing “snow insurance.” This insurance insures against ski/days lost from lack of adequate snow. It was made available for the first time last winter.

In terms of human health, warmer seas likely will contribute to greater duration and intensity of harmful algal blooms. These blooms increase the probability of shellfish contamination and neurotoxic shellfish poisoning in humans. Although the recent death of a prominent El Pasoan from eating bad shellfish shipped in from the Gulf of Mexico wasn’t related directly to global warming, warmer seas increase the risk that similar tragedies could become more frequent in the future as a result of climate change. Heat mortality from extended heat waves presents another human health concern associated with global warming.

Communities could lose beaches, wetlands and coastal property as sea level continues to rise from melting glaciers and expansion of sea water as it heats up. Preventing this damage can have high out-of-pocket costs; it has been estimated that sand replenishment to protect California’s coastline from a 20-inch sea level rise through 2100 could cost $174 million to $3.5 billion.

What can agents do?
With numerous risks exacerbated by climate change, agents have a chance to take on a role as community educators and leaders. Donald Griffin, director of business and personal lines at the National Association of Independent Insurers, explains, “Independent insurers have a responsibility to educate their customers, to make them aware of the greater chance of catastrophe as the climate warms.”

Insurance agents often are the best source of information for the public regarding all types of risks, especially in smaller communities. As with any other risk, agents should educate themselves about the science and loss issues associated with climate change. The U.S. Environmental Protection Agency’s global warming website at www.epa.gov/globalwarmingwww.epa.gov/globalwarming provides more information on the subject that is specific to the insurance industry.

After learning more about climate change, agents can educate their customers and communities. Just as an insurance company might offer a course in bicycle or fire safety to reduce its customers’ risks, the company could provide information on steps customers can take, such as replacing an old furnace or water heater with more energy-efficient equipment. Steps like these reduce the use of fossil fuels and therefore emissions of greenhouse gases. Upgrading an old furnace or water heater will lower the homeowner’s energy bill and may also reduce risks of fire or a water leak that can result in claims costs.

“Agents must make sure that their clients have proper coverage, especially storm and flood insurance,” Griffin says. “Agents need to let people know that they’re going to need more protection in the future.” In addition to education, agents can be instrumental in protecting their policyholders from the potential risks associated with climate change.

Most of the products for protecting against climate change risks already exist, but an opportunity may arise to develop and market new products to cover risks that are not currently protected. As with snow insurance, companies are developing or expanding coverage for loss-of-business due to weather-related events and are recognizing that losses due to climate change will likely increase in the future.

A healthy insurance industry
Insurers are an important safety net to a stable economic and social system. States and federal agencies like EPA can help build partnerships that promote a healthy insurance sector by reducing risks associated with climate change. EPA has already initiated partnerships with key insurance industry associations to explore risk reduction opportunities.

EPA also is working to increase the flow of climate change information to the insurance sector with the publication of informational pieces, such as a four-page brochure entitled “Preparing for Global Warming: Smart Insurance.” EPA also sends out regular e-mail listserv updates geared specifically to the insurance industry.

At the industry level, Congress is considering a variety of financing mechanisms to help keep the insurance industry solvent. In addition, large reinsurance companies such as Swiss Re have “been considering the potential effects of climatic change for years,” says Frank Nutter, president of the Reinsurance Association of America. Nutter has long been concerned about the risks of climate change. “The financial interest of the insurance industry is so intertwined with weather and climate that it is incumbent upon the industry to understand them better and consider them in their business strategy,” he said.

The climate change issue is appearing more and more on the industry’s radar screen. By addressing it now you can be ahead of the curve.

John Foster is a program analyst at the U.S. Environmental Protection Agency in Washington . DC.

Topics USA Carriers Texas Agencies Talent Flood Agribusiness Climate Change Market Pollution Human Resources