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As populations press towards coastlines and riverways, and into fire-prone areas, and become increasingly dependent on weather-sensitive infrastructure such as the electric grid, the growing risks of climate-related hazards are throwing a wrench in insurance markets. Climate change is conspiring with development and land-use planning practices to magnify exposures to catastrophes. The net effect: steeply rising economic losses from extreme weather events are sending public and private insurance markets scrambling to manage unprecedented exposure. Insurers are in some ways the proverbial canary in the coalmine when it comes to climate change; they are positioned to both provide an early warning and help manage the risks.
 The specter of climate change has ushered in significantly increased variability and unpredictability of catastrophic losses. This has not been lost on insurers. In its response to the 2005 Carbon Disclosure Project (an annual survey conducted by institutional investors representing $57 trillion under management), Bermuda-based ACE Limited, a global insurance organization, remarked that:
"Radical changes in natural catastrophe frequency and/or severity could eliminate certain of our markets through physical damage, price escalation, or regulatory activity... unpredictability could negate the use of actuarial techniques and undermine our ability to price and risk-manage product offerings." (See here.)
Since Hurricane Andrew, both the availability and affordability of insurance in coastal areas have been under pressure. Millions of homeowners and businesses have found private insurance coverage unavailable or unaffordable and have had to resort to public risk pools. This is often blamed on the over-regulation of insurance prices, but the fact of the matter is that even non-residential insurance providers (which typically are regulated little, if at all) have also withdrawn or shifted more risk back onto their customers. More difficult to detect than formal withdrawals or headline-catching price spikes is the "hollowing out" of coverage through increased deductibles, reduced limits, and new exclusions.
The crisis is exemplified in a study from Rand Corporation in which a coastal property owner bought $38 million in coverage in 2005 for $250,000. In 2006, after their insurer refused to renew their policy, the customer was able to buy only $5 million in coverage, at a cost of $940,000—a four-fold rise in cost and nearly eight-fold drop in coverage. (See here.)
See full article here.
Dr. Evan Mills
Staff Scientist at the US Department of Energy's Lawrence Berkeley National Laboratory
29 April 2010
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