A New Worry for Insurers
Wednesday, October 5, 2005
The devastation and cost of Hurricane Katrina provided a new hook for a faction of the insurance industry that is trying to raise public awareness of global warming and push the topic onto the political agenda.
Some of the industry's largest companies have sided with environmental groups in recent years to argue that global warming exists and that man-made causes are adding to the severity and cost of natural catastrophes.
Although no insurer has cited global warming's increased risks as a reason for raising rates, some are funding their own research on the topic and, in the political realm, are supporting measures to reduce emissions.
American International Group Inc., the largest U.S. insurer, says it recognizes the possibility that climate change might be increasing insurance losses, though it is awaiting more scientific proof of a link. The New York-based company is considering a policy of targeting investments toward companies involved in mitigating greenhouse gases.
"We take the possibility seriously and efforts to address it seriously," said Chris Winans, an AIG spokesman.
The industry's interest goes beyond property damage caused by hurricanes. Swiss Reinsurance Co., a giant Zurich-based provider of backup insurance to insurers, says climate change could increase the severity and spread of contagious diseases by extending the ranges of disease-carrying insects such as mosquitoes, altering markets for life and health insurance, while new rules on industrial emissions could generate shareholder suits, changing the market for directors' and officers' liability coverage.
"You can always find a scientist somewhere who says the opposite of what other scientists are saying," said Ivo Menzinger, head of sustainability and emerging risks for Swiss Re. "But the majority of scientists acknowledge today that there is global warming, first of all."
He added, "What we are saying is that despite the uncertainty, the potential effects of climate change are such" that companies should err on the side of safety.
In Nebraska, a series of droughts in recent years have devastated crops and local economies, draining a tax-funded crop insurance program and leading insurers to ask whether global warming is implicated, said L. Tim Wagner, Nebraska's insurance commissioner.
"It's more than hurricanes," Wagner said. "We're just seeing changes in weather patterns."
The insurance industry is split on the question. The American Insurance Association, which represents 400 property and casualty insurers, says the debate about global warming has not been resolved.
"The science isn't that definite," said David F. Snyder, the group's vice president and assistant general counsel. "There's no consensus in the insurance industry on the issue."
He said the group believes industry's clout would be put to better use pressing for stricter land-use rules to keep development out of dangerous areas and for better building codes in marginal areas where development is allowed.
In general, European insurers are more apt to back the notion that the climate is changing at all and that governments should do something about it. Unlike its U.S. counterpart, the Association of British Insurers actively promotes public awareness about global warming and in June published a study concluding that climate change could cause annual losses from major storms to increase by two-thirds, to $27 billion, by the year 2080.
The study also said that under "high-emissions scenarios," in which carbon-dioxide levels double during the century, insurers would need to increase their capital by 90 percent to cover U.S. hurricanes and 80 percent for Japanese typhoons. The higher losses and capital costs could result in premium increases of 60 percent in those regions, the study said.
Insurers began to study possible links between climate change and catastrophic losses in the wake of Hurricane Andrew in 1992, which produced a then-record insured loss of $21.5 billion. The push gained steam after a string of more recent expensive losses, including four major hurricanes last year that created about $28 billion of damage in Florida. The double hit from Katrina, with a new-record loss estimated at $40 billion or more, and Rita, with losses of at least $4 billion, has fueled the intra-industry argument.
Swiss Re since 1994 has endorsed the idea that the climate is changing and employs 20 scientists and engineers to study the question.
While quick to note that no event or its severity can yet be linked with certainty to climate change, some insurers began to take the position that governments nonetheless should take preventive action to reduce greenhouse emissions in the atmosphere.
While it confines most of its climate emphasis to raising public awareness, Swiss Re has pushed for political action. For instance, it has worked with a United Nations-sponsored insurance group that backed the 1997 Kyoto Protocol, an international agreement to limit so-called greenhouse gas emissions, particularly in industrialized countries. The company, in a policy statement, says that even natural climate changes carry "risks far greater than generally assumed" and that man-made influence on climate will aggravate them.
"It is a dangerous misconception to regard even minor changes in climate behaviour as nonthreatening," the company said in the statement. "Even a small shift in the climate pattern can lead to a disproportionately frequent failure of protective measures. Once protection measures fail, loss figures rise exponentially."
Environmental groups say the arrival of insurers, along with a scattering of other corporations pushing for action on climate change, has boosted the anti-global-warming camp's credibility. "When they're concerned, it's worth listening to," said David Tuft, campaign director for the Natural Resources Defense Council, an environmental group.
At the same time, some free-market conservatives deride insurers' expressed concerns about global warming as a public-relations ploy and an effort to distract attention from poor decisions to underwrite storm-prone areas.
"Insurance companies are not financially exposed because of any supposed global warming," said Steven Milloy, portfolio manager for Free Enterprise Action Fund, an activist District-based mutual fund formed to resist shareholder groups that push social agendas. "They're exposed because they've spent decades writing policies for risky coastal development and not charging sufficiently high premiums."
Still, some executives and officials have pushed the U.S. industry to address the issue. For instance, Wagner, the Nebraska insurance commissioner, helped organize a symposium scheduled for last month on whether global warming contributed to natural catastrophes -- canceled when Hurricane Katrina roared through and inundated the New Orleans hotel where the conference was to be held.