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Natural disasters: Who pays in the climate change era?

The insurance industry is starting to feel which way the wind is blowing, says Jon Entine

A black future

Cape Verde-type hurricanes are the worst. They form off the coast of Africa and whip westward across the warm Atlantic. By early September 2004, one of the fiercest storms on record, Hurricane Ivan, had the Caribbean in its sights.

It targeted the Windward Islands first, levelling 90% of all buildings in Grenada, then turned north, passing within miles of Jamaica. Winds reached 133mph. Rainfall exceeded 35 inches. Mudslides washed out roads. Montego Bay and Kingston flooded. Hundreds of thousands of people were forced from their homes, many of which were destroyed willy-nilly. An estimated 64 people were killed in Grenada and Jamaica and 45,000 left homeless. Damage topped $1.3bn. Insurance coverage was woefully inadequate.

Can the intensity of this hurricane or any weather disaster, the undeniable melting of the ice caps, increases in ocean temperature and acidity, the bizarre northern hemisphere winter of 2011-12 or any other specific temperature-related phenomenon be attributable to human-induced global warming?

We cannot be certain. But we can be sure that temperatures are increasing and humans are playing a role.

Crass calculations

It’s all well and good for global warming sceptics, making crass political calculations, to wave off any discussion of how to deal with the impact of climate change. At some point someone will have to pay the piper and almost certainly it will be the taxpayer – or the adjuster if those affected are lucky enough to afford and secure insurance. That’s why the insurance industry is sending out danger signals.

Consider Jamaica. Five major storms, between Ivan in 2004 and Gustav in 2008, each left upwards of $1.3m in damages, a significant ongoing difficulty for the comparatively poor nation. Its economy depends on climate-vulnerable industries such as agriculture, fishing and tourism. Scientists at the Geo-Informatics Institute of the University of the West Indies predict a rise in sea level of a minimum two to three millimetres per year during the first half of the 21st century. That could devastate densely populated coastal areas if Jamaica doesn’t prepare.

Facing oblivion

Negril, one of the world’s most gorgeous beaches, faces oblivion without surge protection construction that will cost $25m. Structural changes to ports and roads to protect Jamaica from sea level rise will cost an estimated $530m, even without estimating the impact on natural resources, according to the Caribbean Catastrophe Risk Insurance Facility. The CCRIF fears it could be swamped by reinsurance claims if global warming estimates are accurate and proper precautions are not taken.

That grim scenario is repeated around the world.  The insurance industry, the world’s primary financial risk manager with $23tn in global investments, has growing fears that trouble lies ahead. “Extreme weather is a threat today and a greater threat tomorrow,” says Pete Thomas, chief risk officer at British-based Willis Re, one of the world’s leading reinsurance intermediaries, which joined with Swiss Re and other leading insurers in March to lobby the United States Congress to break the stalemate on addressing climate change.

Weather related industry losses in the US alone have increased more than 50%, to $30bn, over the past decade. In 2011, the industry faced a record number of catastrophic natural disasters, considered weather related events, that each left more than $1bn in damage.

Bad year

The Geneva Association, the leading international insurance thinktank, dubbed 2011 the “annus horribilis” – a frightening and inevitable sign of things to come, it believes.

“From our industry’s perspective, the footprints of climate change are all around us and the trend of increasing damage to property and threat to lives is clear,” says Franklin Nutter, president of the Reinsurance Association of America.

The challenge is that while European insurance companies are inching towards addressing this challenge, insurers in other countries, particularly in the sceptic-dominated US, seem perfectly willing to offload inevitable clean-ups on taxpayers. According to a 2011 survey by the Coalition for Environmentally Responsible Economies (better known as Ceres), only 11 of 88 companies said they had formal climate risk management policies in place and more than 60% reported having no dedicated management approach for assessing climate change – a suicidal ostrich strategy, say economists and climate experts.

Weather change and its consequences are inevitable. Governments and rating agencies around the world have tools at their disposal to “motivate” short-term-focused insurers to broaden their risk perspectives, with their executives facing personal liabilities if their coverage reserves fall short. Without more aggressive moves, the rest of the world could end up like Grenada and Jamaica, circa 2004.

Jon Entine is senior fellow at the Center for Risk & Health Communication at George Mason University and founder of ESG MediaMetrics, an environmental consultancy. 

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Comments

The reality in Australia

I hear what you are all saying, but from an Australian tourism perspective, consider this:
1. We are seeing an increase in bush fires partly attributed to CC (Government position).
2. We are seeing a substantial increase in insurance premiums (above inflation rate)
3. We continue to see business and tourism boards fail to prepare adequate risk management strategies including bush fire survival plans
4. We continue to see weak domestic tourism figures
5. We have many Australian government scientific studies, UNEP and UNWTO reports on CC based on scientific analysis, but the tourism industry is not adapting

Adaptation to a more sustainable world is not a bad moral position to take (I am sure you all agree) nor necessarily and expensive choice. But lack of risk management mitigation and adaptation and continued insurance increases is putting pressure on high costs on tourism (the world’s largest industry).
I don’t think we will progress quickly to a better world if argument focuses on alarmist/calmest/Denyers and who is right. Progress will benefit from embracing innovation, connection to nature and making sustainable living a social norm…and more.
Christopher Warren
Director
International Centre for Responsible Tourism-Australia

tax the prohet's profits

Well, Mr. Entine, given that you profit directly off climate change with your business, you should be first in line to be taxed, no?

The true climate deniers are

The true climate deniers are those who deny that climate is ever-changing. The alarmists still havent figurered that out.

Does weather=climate?

"But we can be sure that temperatures are increasing and humans are playing a role."
According to the temperature record (Hadley Centre, UK, and UAH) temperatures have been flat since 2000, and steadily declining since 2009. We are sure that temperatures are not increasing; however, CO2 levels have been increasing. It is clear that they are not related. Therefore, we are unsure of the human role, if any.

In addition, studies have repeatedly shown that there is no evidence that storms are getting stronger or more frequent. In fact, the opposite is true.

This article is another load of misinformation doled out by the environmental movement.

Please practice critical analysis methods

This article at best neglects several factors and at worst is purposefully misleading.

As one example, the 50% increase in losses over the past decade are interwoven with a 25% increase in the consumer price index from 2002 to 2012. Prices become more expensive over time, so we would naturally expect losses to increase in price. That is part of the reason why every few years there is another loss record setting hurricane.

The other part of the reason is that development of coastal areas is neglected. An increase in the United States population of 9.3% has been experienced over the past decade. Coastal areas characteristically experience especially large development. Even if one says the population has uniformly expanded, an expected increase of 9.3% in losses would occur.

These two factors alone of consumer price index increases and population increases give an increase in losses of 37% (1.25 x 1.093). The author has either neglected or not informed the reader of these factors and the effects seem exaggerated. This begs the question of which other factors are ignored.

My purpose here is not to deny climate change. My purpose is encourage people to avoid exaggeration of the evidence. Science has the tools and methods necessary to demonstrate the truth. There is no need to embellish the evidence and subsequently be accused of being an alarmist.

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