| WASHINGTON
- March 26 - Insurance companies have paid out $91.8 billion in losses from
weather-related natural disasters in the 1990s so far, close to four times the
weather-related claims handed out during the entire decade of the 1980s. At $15
billion, weather-related insured losses in 1998 were second only to the $25
billion recorded in 1992, according to the recently compiled estimates from the
German reinsurance company Munich Re.
The rising insurance claims of the last decade have coincided with rises in
global temperatures: six of the ten warmest years on record have occurred since
1990. The increasing toll of claims has already raised premiums and made it
difficult to obtain insurance in disaster-prone areas such as the Caribbean. If
these trends continue, insurance coverage could become unaffordable or even
unavailable to property owners and businesses living in these and other
high-risk areas--particularly coastal regions and islands. Taxpayers may also
have to foot the bill to help insurance companies fend off overexposure or
insolvency, as they are now in Florida.
The largest insurance claims of 1998 were from Hurricane Georges, which hit
the United States and the Caribbean, costing insurers $3.3 billion; from the ice
storm that swept across the U.S. and Canada, bringing $1.2 billion in insured
damages; and from flooding in China, which cost the industry $1 billion.
Munich Re estimated in its 1998 year-end report that the number of natural
catastrophes has tripled since the 1960s, increasing the overall cost to the
world's economies nine-fold, and the cost to the insurance industry
fifteen-fold. Munich Re attributes this large increase to the growing
concentrations of people and property in coastal regions and other
"high-risk zones," as well as to climate change. Scientists now
believe that rising global temperatures may exacerbate extreme weather events,
leading to increased damages in the decades ahead.
Climate change has added a new element of risk to the insurance equation.
Rising temperatures increase the amount of evaporation from the oceans, which
tends to increase rainfall in many flood-prone areas. In addition, higher
temperatures add to the heat energy that fuels thunderstorms, tornadoes, and
hurricanes. Gerhard Berz of Munich Re recently said, "A further advance in
man-made climate change will almost invariably bring us increasingly extreme
natural events and consequently increasingly large catastrophe losses."
Another factor in the escalating cost of insured losses has been the effort
of governments and insurers in industrial nations to make inexpensive insurance
protection widely available, encouraging a coastal migration trend that has
dramatically increased the amount and value of property at risk to storm
damages. Research by the reinsurance company Swiss Re indicates that the
relatively catastrophe-free years of the 1960s and 1970s gave property owners a
sense of complacency, leading them to build heavily in disaster-prone areas.
Some $2 trillion in insured property now lies within 30 kilometers of coasts
exposed to Atlantic hurricanes.
Recent studies find that a single weather-related catastrophe could endanger
the solvency of many insurance companies. A computer simulation by the Arkwright
Mutual Insurance Company, presented at the annual meeting of the American
Meteorological Society in 1998, indicates that the U.S. East Coast is exposed to
"unprecedented hurricane damage" due to explosive coastal property
growth that coincided with unusually low hurricane activity between 1940 and
1990. The study estimates the Eastern U.S. could face hurricane losses of $50 to
$100 billion, placing numerous insurers and reinsurers in danger of insolvency.
Citing the president of a reinsurance industry group who believes that a $50
billion hurricane would exceed the financial capabilities of the insurance
industry, the Arkwright report concludes: "we are...an industry with a
disaster waiting to happen."
A 1998 study by the U.S. National Oceanic and Atmospheric Administration
(NOAA) emphasizes the growing vulnerability of populations and property to
hurricanes. Comparing normalized hurricane damages between 1925 and 1995, the
report concludes "it is only a matter of time before the nation experiences
a $50 billion or greater storm, with multi-billion dollar losses becoming
increasingly frequent." According to NOAA research released this past
January, the U.S. has already seen 37 "billion-dollar storms" since
1980 -- 31 of them since 1988 -- totaling $160 billion in damages.
The danger to insurers of higher storm damages has led to the emergence, in
private financial markets, of "catastrophe bonds" and other means of
hedging risks that the insurance industry will not cover. Meanwhile, the
insurers and reinsurers that have traditionally resisted government attempts to
regulate the private insurance market are now looking to the public sector for
help. Last year, industry representatives testified before the U.S. Congress,
calling on the federal government to provide a "backstop" of
reinsurance protection for states and insurers in the event of natural disasters
that yield damage claims beyond their financial resources. As a representative
of the American Insurance Association told Congress, the U.S. economy and
insurance industry are "simply not prepared" for a massive hurricane
and its socioeconomic effects.
The Florida State legislature is also appealing to the federal government to
create a natural hazards insurance program to provide reinsurance for
catastrophic events. A 1998 working paper from the Natural Hazards Center at the
University of Colorado, Boulder reveals that Florida is still in the midst of an
insurance crisis six years after experiencing the largest insured loss event in
history, Hurricane Andrew, which caused $16 billion in insured losses. Andrew
left seven insurance companies insolvent, and led 44 to reduce their exposure by
reducing coverage and raising premium levels. Thousands of people were left
without insurance and unable to collect claims, and many insurers sought to
leave the state. To ensure available and affordable coverage, the state
government has established a public underwriting agency, now the state's second
largest insurer, and created funds to cover insurers for hurricane catastrophes
and homeowners for wind damages. As a result, Florida taxpayers are now
underwriting at-risk homeowners who private insurers are unwilling to cover,
reinsuring insurers against weather-related catastrophes, and propping up the
state's home building industry and its relentless construction in high-wind risk
areas.
Last year's weather-related losses for the insurance industry would have been
much higher had the largest events--the Yangtze floods and Hurricane Mitch,
which together cost $35 billion--not occurred in poor regions with minimal
insurance coverage. Developing nations, where some of the most severe disasters
of the last few years have occurred, have little insurance today, and could find
it hard to achieve widespread affordable property insurance if they continue to
be plagued by disruptions of this scale. In China, the Yangtze floods displaced
223 million people--close to the entire U.S. population.
As developing nations attempt to build an infrastructure and economic base,
some may find insurance rates prohibitive because of their demonstrated
vulnerability to extreme weather events. Already, many insurers have raised
premium rates for, and some have withdrawn property insurance entirely from,
islands like Jamaica following the destructive hurricane Hugo of the late 1980s.
Increasingly hazard-prone regions in the Caribbean as well as the Pacific are
finding insurance very expensive or impossible to obtain.
Many poor, low-lying islands and coastal nations in the Caribbean, Indian,
and Pacific Oceans depend on insurance to attract investment in their tourism
sectors, which account for as much as 70 percent of their gross national
products. These nations, highly susceptible to rising sea levels and storm
surges, may see their real estate values drop as investment patterns shift in
response to the reduced availability and affordability of property insurance.
The banking industry has already seen the withdrawal of coverage for properties
on small islands that were being considered for long-term financial investments.
Heavy uninsured losses may also bring loan defaults, and because property is
often used as security for loans, some experts fear falling property values
could trigger a "credit famine" in local economies. As storms become
more frequent and intense, phenomena like these may spread to other parts of the
world.
###
|
Share This Article With A Friend