A Changing Climate for Insurance Companies

by Yee Huang

January 12, 2009

Environmentalists are not usually accustomed to having industry allies in their efforts to address climate change.  However, behind the scenes large private insurance companies have long advocated for reducing the greenhouse gas emissions that contribute to climate change and ultimately threaten these companies’ bottom line.


Recently, reinsurance giant Munich Re attributed significant human and financial losses in 2008 to climate change and increasingly severe weather events.  A deadly cocktail of hurricanes, earthquakes, and other natural disasters caused nearly 220,000 human deaths, as well as financial losses totaling $200 billion.  These totals represent a 150-percent increase in financial losses from 2007. 


According to a press release by Munich Re on the impacts of climate change on the insurance industry, major catastrophic events in 2008 included:

  • Cyclone Nargis in Myanmar, which brought heavy rainfall and a storm surge that caused more than 3 meters of flooding and extended 40 kilometers inland, respectively;
  • The earthquake in Sichuan Province, China, the single most costly event in 2008 at $85 billion, in which 70,000 people died and more than 5 million people were left homeless; and
  • Hurricane Ike in the United States, one of many hurricanes in the fourth most active North Atlantic hurricane season on record.

Other studies have noted an increase in losses and claim filings during periods of increased temperatures. 


While building codes, land use planning, and pre- and post-disaster monitoring and responses have mitigated some impacts, urban development and sprawl have exacerbated the impacts of severe weather events.  For example, the loss of natural coastal barrier ecosystems, such as the mangrove forests along the low-lying coastal delta in Myanmar, likely caused even greater damage. 


In response to the current and predicted losses from severe weather events, Munich Re board member Tortsen Jeworrek has called for a 50-percent reduction in greenhouse gas levels by 2050, an ambitious goal for international policymakers to consider at the Copenhagen climate summit later this year. 


For insurance companies in the United States, an honest assessment of the risks of climate change invites skepticism.  A 2006 report by the World Wildlife Fund and Allianz insurance described the dilemma:

The industry is stuck between a rock and a hard place in that it is clearly in their best interest to examine this risk, and at the same time the industry is often bombarded by popular media for being ‘self serving’ if they put too much energy or effort into studies that may cause rates to rise.

Even more troubling is the impact of climate change on federal- and state-funded insurance programs, such as Florida’s Citizens Property Insurance Corporation, which vaulted to the forefront as the state’s largest coastal property insurer after private insurance companies increased rates or simply stopped providing coverage.  In a state that could aptly be nicknamed the Hurricane State as well as the Sunshine State, Citizens’ failure to adequately account for climate change as part of the risk assessment results in fiscally unsound rates that further exacerbate its precarious financial situation.


Financial concern for their bottom lines has prodded private insurance companies out of their behind-the-scenes role into the spotlight to encourage research and development for a new energy paradigm to reduce the impacts of climate change.  These same concerns should motivate government-sponsored insurance programs to follow the lead. 

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