The Unpredictability Of Future Climate Brings Significant Threats For Insurance Companies

INSURANCE IN A RISKY WORLD

The unpredictability of future climate brings significant threats for insurance companies

FRANK MARTIN

Until very recently, very few could imagine that concepts such as global warming or climate change could appear in economics textbooks. Nowadays, these concepts have become a subject of study not only by academic economists but also for financial analystsand insurance companies trying not only to identify the opportunities, but also measure the risk and impact of the threats that arise in the new climate scenario. The purpose of this essay is to carefully determine and analyse these unpredictable threatening consequences of climate change in the scope of insurance market. In order to achieve that pretension, this paper will begin describing thepossible disasters, focusing on their costs. Then their possible combination with others inherent threats in the insurance market and finally the role of governments will be discussed.
First of all, it is important to ascertain which are the consequences of climate change and their risks. And even more important, which of them are particularly affecting the insurance market. In order to achievethis information the International Pannel on Climate change seems the most reliable source. IPCC might be considered as the leading international body for the assessment of climate change and its supported by the UN .According to the most recently scientific data published in 2007, the fourth assessment elaborated by Pachauri Rajendra K. et al (2007):
During the decade between (1995-2006)eleven of these years were rank among the twelve warmest years since 1850. The expected further warming is about 0.1º C per decade. Increases in sea level rose at an average rate of 3.1 [2.4 to 3.8]mm per year from 1993 to 2003. Forest fires and the area affected by drought has increased as well as consequences of these two changes. Some extreme weather events have changed in frequency and/orintensity over the last 50 years; such as the increase the intensity of hurricanes in the hemisphere since the 70´s. Agricultural fields are suffering alterations, fires and pests owing to the rise of temperatures. They also consider as an undeniable fact the increasement of weather catastrophes due to climate change and predict that it will continue growing in the future as well.
In order toillustrate the economic impact that could have of one of these catastrophes, below it is shown the example of Hurricane Katrina.

According to the report about Katrina by Richard D. Knabb (2007); who preliminary estimate that the losses reached 81 billion dollars. Approximately half of these losses was covered by insurance companies. Considering that an average insurance company such as Zurich hada global net benefit of 3.43 billion dollars in 2010 (Zurich Financial, 2011) it demonstrates the magnitude impact that can reach these weather catastrophes. A similar disaster, Hurricane Andrew in 1992 leaded to nine insurers company to be in an insolvent situation. The estimated cost of insured assets, according to the insurance company Swiss Re (2005) were 22.3 billion dollars.

With thisnew climate scenario it could be possible to consider that an increase of these events might become a serious threat for the solvency of insurances companies.




The following graphic shows how the costs of natural disaster had been increasing trough time.
Source: Munich Re 2001.

As it is possible to notice above, in comparison with the decade of the sixties, the economic lossesincreased nearly nine times during the decade of the nineties and will continue increasing in the future.The evidence therefore suggest an increasement in intensity and/or frequency.
Unfortunately for the insurance companies the premiums only increased according to inflation owing to the delusion that risk was steady on time. Their turnover did not increase enough either to cover these losses....