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 the sixth-highest in total losses for insurers since 1980 and also an indication 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 rises to $130 billion in comparison to $50 billion the year before. These losses don’t take into account the extreme flooding in Australia that came 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 resulted in major economic damage and loss of life.

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

Dodging the Bullet

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

This increased activity is attributed in part to significantly warmer than usual water temperatures in the tropical north Atlantic where most storms form. Peter Höppe, Head of Munich Re's Geo Risks Research Unit said in the past 30 years, “all ocean basins show an increase in water temperatures. This long-term trend can no longer be explained by natural climate oscillations alone. No, the probability is that climate change is contributing to some of the warming of the world's oceans. This influence will increase further and, together with the continuing natural warm phase in the North Atlantic, is likely to mean a further high level of hurricane activity in the coming years."

Climate change also likely played a role in at least some of the other weather-related disasters. This raises an interesting academic issue of what defines a “natural disaster” given human’s role in altering the climate. A more important question is how should insurance companies respond?

The Role of Insurance in a Changing Climate

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

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

There are some smaller-scale efforts to offer insurance in developing countries. Index insurance has been used in agricultural settings. It sets a threshold for drought, for example, and if that threshold is reached, farmers who have a policy are paid out. Other microlending programs 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 scaled up so people in developing countries can take full advantage of them. Large insurance companies could help underwrite more of these policies to get the ball rolling.

Insurance companies are also in a unique position to incentivize mitigation. Some companies already do this. Farmers’ Insurance offers discounted rates on hybrid vehicles where state law permits. Offering discounts for hybrids is just the tip of the iceberg, though. Insurers could also cut rates for individuals or institutions that purchase zero emissions energy.

It would behoove insurance companies to consider unique mechanisms to influence mitigation sooner than later. A 2005 report put out by the Association of British Insurers shows what would happen if emissions increase unabated.

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

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

Photo credit: alancleaver_2000