Insuring against catastrophe

Gerhard Berz describes how global warming is increasing natural disasters,
and calls on the insurance industry to act

The burden of claims resulting from natural catastrophes has taken on dramatic dimensions. Before 1987 only one – Hurricane Alicia in 1983 – had ever cost the insurance industry more than $1 billion. Since then 29 have done so. The record holder, Hurricane Andrew, cost insured losses of approximately $17 billion, but these would have been several times greater if Andrew had not narrowly missed Miami and New Orleans. This hurricane, the 1995 Kobe earthquake and the 1994 California earthquake – which only marginally affected the greater Los Angeles area, but still caused more than $15 billion in insured damage – can be considered as just ‘grazing shots’.

By 1990 economic losses from natural catastrophes were three times as high as in the 1960s, and insured losses were five times greater. Over the last ten years these increases have shot up eightfold and 16-fold respectively. And these figures only take major natural catastrophes into account. The claims resulting from the 600 or so other natural hazard events which take place around the world each year at least double the total losses.

Rising values
These increases are largely, or even mostly, due to rising values and insured liabilities, particularly in conurbations in highly exposed regions. Natural catastrophes, such as Hurricane Andrew and the earthquakes in California and Japan, have shown clearly that buildings and infrastructures have become even more susceptible to damage, despite building regulations and technical advances.

However, there is increasing evidence that emerging climatic changes are influencing the frequency and intensity of natural catastrophes. Major windstorm catastrophes set new loss records almost annually, while innumerable flood, tempest, drought and forest fire emergencies now seem to occur more frequently than ever before. The Californian and Japanese earthquakes are the only two of the 29 natural disasters costing over $1 billion that were not of atmospheric origin.

The second report of the Intergovernmental Panel on Climate Change in 1996 saw no proof of the connection between global warming and the increased frequency and intensity of extreme atmospheric events. Since then however, studies and simulations have provided much new evidence.

They show, for example, that anticipated increases in average temperatures cause an extraordinarily sharp rise in the probability of extremely high ones. For example, a rise of 1.6 degrees centigrade in the average summer temperature in central England – expected by approximately 2050 – would result in a hot summer, like the one in 1995, re-occurring every three years on average, instead of the 75 years predicted on the basis of 1961-1990 temperature records. Similarly, the highest temperature reached in Berlin in this century (39 degrees) will be nine times more likely to be exceeded by the end of the next century. We are in no way prepared for such heatwaves, and so can expect to suffer considerable losses and adjustment costs.
There is reason to fear that climatic change will lead to natural catastrophes of hitherto unknown force and frequency
To take another example, recent decades have brought significantly wetter winters to Central Europe. More of the winter precipitation falls as rain, rather than snow, and so most of it runs off before being absorbed. Flooding catastrophes on the Rhine, such as in December 1993 and January 1995, have increased. A recent study predicts that the likelihood of excess rainfall will increase considerably. Global warming will also lead to ever more frequent and heavier downpours of the kind already responsible for most flood damage.

These milder winters have also reduced the extent of snow-covered areas above which stable, high-pressure zones of cold air used to form, creating a barrier against low-pressure storm fronts approaching from the Atlantic. So this barrier is often weak, or has shifted far to the east. As a result, series of devastating hurricanes, such as occurred in 1990, can no longer be considered rare and exceptional. German wind records indicate a marked increase in the number of windstorm days in recent decades.

Worldwide losses
Other recent studies have indicated, disturbingly, that climatic changes could trigger worldwide losses totalling many hundreds of billions of dollars per year. Most countries can expect their losses to range from a few tenths of a per cent to a few per cent of their gross domestic product each year, and certain countries – especially small island states – could face losses far exceeding 10 per cent. These studies still require substantial improvement before they can be considered conclusive and reliable but, when that point is reached, they might convince even those governments and businesses still hostile to international action to combat global warming.

Earnest warnings
The insurance industry – drawing confidence from its extraordinary ability to adapt to changing risk conditions – might take the stance that climate change is relatively unimportant for insurers. It should be earnestly warned against this. There is reason to fear that climatic change in nearly all the regions of the Earth will lead to natural catastrophes of hitherto unknown force and frequency, and trigger considerably greater capacity problems on the national and international insurance markets than those that have occurred recently. Assessing these developments incorrectly could jeopardize the future of the entire industry in some regions. Premium adjustments would continually lag behind loss trends.

The insurance industry can effectively protect itself against the consequences of climatic change, while doing much to promote measures to protect the climate, and to gain acceptance for them. No other sector of the economy has such effective instruments for encouraging risk reduction, but they will only work if the industry can involve its customers and public authorities as partners. Customers, for example, will be far more inclined to adopt measures to prevent and minimize losses if they can be convinced that natural hazards policies with a substantial deductible amount are advantageous for both sides, because they relieve the insurer from having to pay large numbers of minor losses that can be regulated far more effectively by the customers themselves and thus enable much more cost-effective protection. Similarly, if cover for certain hazards or risk zones were excluded – or narrowly limited – public authorities would inevitably come under growing pressure to take regulatory measures to lessen the risk or to combat the causes.

A major role
It would be wrong to transfer tasks which properly belong to government to the insurance industry, by making it responsible for penalizing its customers’ environmentally deleterious behaviour – or rewarding environmentally friendly action – as environmental protectionists have occasionally demanded. This cannot be the task of industry, even if it is in its own interest.

However, the insurance industry must assume a major role in implementing protective measures, so as to ensure that it can provide long-term cover for natural hazards. It should take autonomous action and full advantage of its options for promoting protection of the climate. It could have a big impact here – and, as the industry specializing in the management of future risks, this would be only fitting

Dr. Gerhard Berz is head of the Munich Re Geoscience Research Group and Member of its Executive Management.

PHOTOGRAPH: Jovanovic Zoran/UNEP/Still Pictures

This issue:
Contents | Editorial K. Toepfer | Learning from disaster | Being prepared | The way forward | Breaking the cycle | Flip-flop to catastrophe | Nature's warnings | At a glance | Competition | Insuring against catastrophe | Recreating sustainability | The legacy of conflict | Ask us, involve us | The poor suffer most | Through a slanted lens

Complementary articles in other issues:
Issue on Climate and Action 1998
Issue on Climate Change 1997
Issue on Small Islands 1999
David Wheeler: New millennium, new regulations (Beyond 2000) 2000
Tom Burke: The greening of Goliath (Beyond 2000) 2000
Domingo Jiménez-Beltrán: Flashing indicators (The Environment Millennium) 2000
Claude Fussler: Clean = competitive (Hazardous Waste) 1999
Max Deml: Greenbacks can back greens (Production and Consumption) 1996