The four major hurricanes that hit U.S. coasts in 2004 cost insurance companies an unprecedented $23 billion. That record was short-lived. In 2005, Hurricane Katrina alone brought $50 billion in insured losses, and claims are still being filed.
But according to two recent reports, American insurance companies aren’t giving enough consideration to the future effects of global warming. Insurance companies make up the world’s second-largest industry, and are powerful investors that often support technologies and policies, such as better building codes, that decrease their losses. The reports maintain that the rising costs from weather damage far outweigh the price of promoting clean technology, wetlands restoration, and other means for lessening the effects of global warming. In addition to offering customers incentives to “go green,” the reports suggest that insurance companies update their sophisticated catastrophic risk models to include the latest scientific climate predictions.
Insurance giant Allianz and the World Wildlife Fund aimed their report, “Climate Change and Insurance: An Agenda for Action in the United States,” at insurance honchos. “Insurance companies manage risk. And we see [global warming] as the biggest emerging risk to the world,” says Matthew Banks, the Fund’s senior program officer. “We’d like to see the insurance industry take on this challenge in a more meaningful way,” he says.
Since climate changes are happening so quickly, the report’s authors claim that the catastrophic models American insurers depend on to calculate risk and determine premiums are inadequate for predicting the type and magnitude of losses associated with global warming. “If you only use data from the past to calculate the future, you might get a picture with insufficient precision,” says Allianz spokesperson Michael Anthony.
The report also stressed the true cost of insurance in high-risk areas. “We have this feeling that everybody has a right to live everywhere they want in the U.S. and pay a low insurance premium,” says Dan Anderson, professor of risk management and insurance at the University of Wisconsin-Madison business school. “But they should be expected to pay the true costs of insurance. And in some cases, you may be in such a risky situation that you won’t be able to get insurance at all.”
In the wake of Hurricane Katrina, for instance, many insurance companies have cancelled policies in high-risk coastal areas. “And they’re also increasing premiums,” Anderson says, “many times 100, 200, even 300 percent.”
But global warming isn’t only affecting those who live in coastal areas, according to “Climate Change Futures,” a report released by Harvard’s Center for Health and Global Environment in 2005. The recent climate changes have also led to more forest fires, floods, heat waves, and expanded the range of infectious diseases. In addition, asthma has quadrupled in the last 25 years, probably in part because ragweed produces more pollen when exposed to carbon dioxide in the air, says tropical disease expert Paul Epstein, an author of the Harvard report. Those events and diseases can lead to more claims, and greater losses for insurers. “Life and health insurance, property and casualty insurance—they should all be considering global warming,” Epstein says.
When looking for solutions to these problems, the insurance industry plays a particularly important role “because without insurers there aren’t investments,” Epstein says. “They are the key to both sensing the losses, and to providing opportunities to invest in new industries, clean technologies.”
Some companies are already catching on. Fireman’s Fund Insurance Company, for instance, is planning to offer a 5 percent credit on property insurance for “green” buildings that have features that—though less prone to water damage and fires—are not covered by conventional policies, like solar panels, green roofs, or recycled water supply systems. And Traveler’s Auto Insurance now offers a 10 percent discount to customers who drive hybrid cars.
Ultimately, the authors of both reports hope that insurance companies will help shape greener public policy in the U.S.
“This will hopefully spark a dialogue at the next major insurance conference,” Banks says. The next step is to get policy makers onboard. “We’d like to do a briefing at Capitol Hill, pulling together staff on both sides of the aisle to consider these problems. It’s an exciting time.”
Story by Virginia Hughes. This article originally appeared in Plenty in October 2006.