Two Steps Forward

Insurers Place a Premium on Climate

The National Association of Insurance Commissioners (NAIC) voted unanimously last week at its quarterly meeting in Orlando, Fla. to establish a task force to examine the impact of climate change on the U.S. insurance industry and on insurance consumers. The task force will look at how a warming climate may affect the availability and affordability of insurance for consumers and the financial health of insurance companies. It also will consider actions necessary "to enable state regulators and insurers to mitigate and otherwise respond to these problems."

As I noted late last year, the insurance industry is taking increasingly aggressive action on climate change. Shaken by the losses they're seeing from hurricanes, droughts, diseases, and some of the other early signs of global climate chaos, large insurers are starting to press their corporate clients on the topic.

The NAIC action comes on the heels of devastating back-to-back hurricane seasons that caused a record $30 billion in U.S. insured losses in 2004 and as much as $60 billion in insured losses from Hurricane Katrina alone in 2005. According to a December 2005 study by the Ceres investor coalition, U.S. insurers have seen a 15-fold increase in insured losses from catastrophic weather events in the past three decades — increases that have far out-stripped growth in premiums, population and inflation over the same time period. The study, Availability and Affordability of Insurance Under Climate Change: A Growing Challenge for the U.S., warns of larger financial losses in the years ahead if climate change trends continue and no actions are taken to face the challenge.

The American insurance industry is far from alone in its concern. For example, the Association of British Insurers last year issued a report, Financial Risks of Climate Change, which used insurance catastrophe models to examine the financial implications of climate change through its effects on extreme storms (hurricanes, typhoons, and windstorms). It concluded that

Climate change could increase the annual costs of flooding in the UK almost 15-fold by the 2080s under high emissions scenarios. If climate change increased European flood losses by a similar magnitude, annual costs could increase by a further $120 - 150 billion (€100 - 120 billion).


Under high emissions scenarios (where carbon dioxide levels double) insurers' capital requirements could increase by over 90% for US hurricanes, and by around 80% for Japanese typhoons. In total, an additional $76 billion could be needed to cover the gap between extreme and average losses resulting from tropical cyclones in the US and Japan. Higher capital costs combined with greater annual losses from windstorms alone could result in premium increases of around 60% in these markets.

Though some may find it hard to be sympathetic toward the insurance industry, you've got to admit that it's not a pretty picture. 

Not that the industry isn't fending for itself. Last week, Berkshire Hathaway, the investment group run by Warren Buffett, raised the price of hurricane insurance as a precaution against the possible impact of climate change. Berkshire's insurance subsidiaries lost $3.4 billion from the 2005 U.S. hurricane season — a significant drag on otherwise healthy annual results. Berkshire is one of the world's largest providers of cover against very large catastrophes, partly by reinsuring companies offering home and property insurance.

As goes Berkshire, so goes the industry — along with the insurance premiums of companies across the land, and the prices they, in turn, pass along to you and me.