Insurance Industry’s Share of Weather-Related Losses Rising, Researcher Says

Also, Majority of Weather Losses Tied to Smaller Events, Not Larger Catastrophes

The insurance industry’s share of the world’s total economic losses from weather-related catastrophes is rising and 60 percent of these weather-related losses are attributable to small events as distinct from headline-catching catastrophes, according to a scientist who has studied the issue for decades.

The insured share of weather-related losses that was a negligible fraction in the 1950s has increased to 25 percent in the last decade, reports Evan Mills, a scientist in the environmental energy technologies division in the U.S. Department of Energy’s Lawrence Berkeley National Laboratory.

The ratio has climbed more quickly in the United States, with more than 40 percent of the total losses insured in the 1990s.

Mills found that from 1980 through 2004, the global economic costs of weather-related events totaled $1.4 trillion (inflation-corrected), of which $340 billion was insured.

“To put the burden of these costs on insurers in perspective, recent average annual losses surpass those experienced in the aftermath of the 9/11 attacks in the United States,” he noted.

In an article, titled “Insurance in a Climate of Change,” published in the Aug. 12 issue of the journal Science, Mills reviews the evidence that the global insurance industry is paying out more in claims caused by extreme weather-related natural disasters. Since climate change could lead to an increase in large-scale and localized extreme weather events, some insurance companies have called for a better understanding of the risks from climate change.

Global losses
In response to industry concerns, Mills studied insurance claims costs from weather-related and other types of catastrophes. He found that the weather-dependent share of global insured losses (about 90 percent) is even greater than that experienced by the world economy as a whole (about 75 percent).

“Global weather-related losses in recent years have been trending upward much faster than population, inflation, or insurance penetration, and faster than non-weather-related events,” Mills wrote. “Specific event types have increased far more quickly than the averages.”

According to Mills, damages from U.S. storms grew 60-fold to $6 billion a year between the 1950s and the 1990s. “As the climate changes, populations are moving more into harm’s way, but demographic factors do not appear to explain all of the increase.”

Mills reported that the insurance is the world’s largest industry, and would be the third largest country if its $3.2 trillion in yearly revenues were compared with national GDPs.

Given the increase in the number, cost, and variability of catastrophic losses, some insurers, reinsurers, and their trade associations now view climate change as a “strategic factor” in charting their future, Mills said.

Particularly vulnerable are the emerging insurance markets in the developing world, reported Mills, who said that emerging markets accounts for $400 billion a year in premiums and grows several times faster than mature markets. These regions are also particularly unprepared for and vulnerable to climate change.

Insurers from wealthy countries share these risks as they take ownership in insurance companies domiciled in the developing world. Weather-related damage can come from such disasters as flooding, droughts, mudslides and wildfires. Storm surges cause coastal damage, and lightning strikes start fires and damage electronic equipment. Gradual climate changes and abrupt weather disasters cause property, agricultural and industrial losses, as well as risks to life and health.

The industry is vulnerable to weather catastrophes in many ways, property damage is only the most obvious, Mills said.

Other weather losses
Other weather-related losses that impact the industry include business and supply-chain disruptions, loss of utility service, equipment breakdown arising from extreme temperature events, and data loss from power surges or outages. Extreme weather events can breach pollution containment, leaving industries open to liability, and power outages disrupt manufacturing and services.

According to Mills, the economic costs of small weather-related events are probably underestimated since damages from small events are rarely captured in statistics. One claim service that aggregates statistics for U.S. insurers only captures those events with costs above a threshold of $25 million.

The availability of insurance helps economies grow and develop by mitigating risk, according to Mills. But if the nature, scale or location of hazards changes, they pose a threat to the insurance system, if insurers are unprepared for the scale of what can be perceived as “inconceivable” disasters.

Mills cites that there is now risk that weather-related claims will increase as the climate changes. Among the reasons for this: storms could increase in frequency or intensity, several kinds of damage could result from a single event, and shifts in the spatial distribution of events could expose more property and population to damaging events.

The diversity and potential magnitude of health-related impacts of climate change can also affect the industry, he said. Of particular concern are a host of respiratory diseases arising from increased pollens, molds, and particulates mobilized by climate change. The actuarial uncertainty to account for such risks can lead to rising insurance prices, reduced coverages and, ultimately, to the uninsurability of certain hazards.

Solvency at stake
As a result, in some cases, insurance premiums might not be enough to pay for claims. In a bad year, weather-related claims, plus unrelated claims from earthquakes or terrorist incidents, together with uncorrelated declines in financial markets (where insurers hold their loss reserves) could form the kind of “perfect storm” that drives some insurance companies to the edge of solvency, Mills said.

“The good news is that the insurance industry has played a valuable historical role in loss prevention,” Mills said. “Insurance companies were founders of the first fire departments, building codes, and auto safety testing protocols. But the role they will play in climate change mitigation and adaptation remains to be seen.”

Recognizing that insurance is a tool that helps society adjust to risk and economic loss, Mills believes that insurers have an opportunity to become more engaged with the science of predicting the potential impacts of climate change, for example, by coupling their existing “catastrophe models” with climate models.

“It’s important that insurers, their regulators, and the policy community develop a better grasp of the physical and business risks from climate change,” Mills said. “The most effective solutions will require public-private partnerships.”

Berkeley Lab (www.lbl.gov) is a U.S.Department of Energy national laboratory located in Berkeley, Calif.

Topics Trends Catastrophe USA Carriers Profit Loss Climate Change Market