California State University Long Beach 

Climate change and the insurance industry

• Modern society depends on a degree of stability & continuity
• Insurance allows individuals to recover from catastrophic loss by spreading the risk out to many people
• Insurers estimate risk by using historical statistics of property loss
• This method averages out short-term variation
• But does not reflect peaks of cycles or unique events
• Certainly does not reflect potential global climatic change
• Natural or anthropogenic (man-made)

 
• Reinsurers insure the insurance companies for catastrophic events
• Too much damage at once for insurance companies to cover alone
• Over $1 trillion of property insured in Los Angeles area
• Over $21 trillion of property insured in USA
• Shell game - only 1/100 of this much is available for cash payment

What if the past is not a good predictor of the future?

Where would this leave the insurance industry and people?

• Wake-up calls
• Prior to 1987 - no losses over $1 billion
• 1987 - UK windstorm, $3 billion insured losses
• 1989 - Hurricane Hugo, $7 billion insured losses
• 1990 - European winter storms, $5 billion insured losses
• 1992 - Hurricane Andrew, $15.5 billion insured losses
• 8 insurance companies went bankrupt
• 1992 - Hurricane Iniki, $4 billion insured losses
• 1994 - Northridge earthquake, $13 billion insured losses
• Predicted future losses
• If a strong hurricane (category 4 or 5) hit:
• New York, $100 billion
• Miami, $80 billion
• Tokyo, $70 billion
• If a big earthquake hit:
• Los Angeles, $80 billion
• New Madrid, $100 billion
• The total amount of assets available to all insurers is only about $200 billion
• Two great events in one year and there is no more insurance!
• Not enough money available!

• Effects of global warming
• May change the frequency of severe storms
• May lengthen the severe storm season
• Raised sea level will make coasts more susceptible to damage
• 4 X’s as many destructive storms in past decade than in previous 30 years put together.
• 64% increase from 1985-89 to 1990-1994 in federal disasters
• One set of predictions indicates:
• 0.9°C temperature increase would:
• Lengthen storm season 20 days
• Increase severity of storms
• Increase catastrophic losses in the U.S. by 30%!

• President of the Reinsurance Association of America calls for more support for the U.S. Global Change Research Program!
• Bermuda Risk Prediction Initiative (Bermuda Biological Research Station)
• Insurance & reinsurance companies are paying members of initiative
• Preliminary research objectives
• Start communication between business and scientists
• Define common ground
• Improve ability to forecast frequencies of tropical cyclone landfall
• Develop proxy records to extend the 100-year documentary record of intense hurricane landfall further back in time
• Develop competing models of climate/loss prediction
• Develop method of raising money through investment bonds
• Tap into the capital market (stocks, bond, etc)
• $20 trillion investment capital
• Daily fluctuation ~$70 billion

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