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Katrina and the Risks of Global Warming

An Insurance Industry Perspective


Updated September 14, 2005
The US has experienced its most expensive natural disaster, Hurricane Katrina. The storm, which came ashore as a Category 4, isn't even the true "big one." (That would be a Category 5 hurricane.) In 2004, Florida was hit by four major hurricanes, setting a new record in economic damages. Have we entered a new era in weather-related natural disasters?

The insurance industry seems to think so. The National Association of Insurance Commissioners, founded in 1871, meets quarterly. Its fall 2005 conference should have had a new topic, global warming. However, the event had been scheduled in New Orleans.

In June, the Association of British Insurers published Financial Risks of Climate Change (pdf):
    Current scientific evidence suggests that global warming could increase the severity of tropical storms, with limited evidence that the number of major storms could change in some regions.
These are business folks: they are exercising fiduciary responsibility to shareholders and their message is grim:
    Under high emissions scenarios (where carbon dioxide levels double) insurers’ capital requirements could increase by over 90% for US hurricanes, and by around 80% for Japanese typhoons. In total, an additional $76 bn could be needed to cover the gap between extreme and average losses resulting from tropical cyclones in the US and Japan. Higher capital costs combined with greater annual losses from windstorms alone could result in premium increases of around 60% in these markets.
In fact, Katrina has already surprassed their estimates for a catastrophic 21st century US hurricane, in part because their report does not take into account increased property values and population densities.

Of course, just like in the medical insurance sector, the cost of prevention is (generally) not covered by the insurers (although they are clearly financial beneficiaries in both instances). Recommendations include improved building codes and reduced carbon emissions, which must be legislated by governments with costs born by individuals, businesses and society.

Is the insurance industry crying wolf?

A commentary in the New Yorker suggests the risk is real. It references work by MIT scientist Kerry Emanuel which appeared in Nature in August. His research shows that storm destructiveness is "highly correlated" with tropical sea temperatures. He is examining intensity, not storm frequency.

What does this mean, other than we can expect the cost of both premiums and damage to escalate?

New Yorker author Elizabeth Kolbert suggests the US must revisit the Bush Administration decision to withdraw from the Kyoto Protocol, which is now binding on 140 nations and which covers 85 percent of the world's population. The US has argued that complying with Kyoto would be too expensive. Which is the greater expense: prevention or remediation? That shelved-by-Congress $14 billion plan to protect New Orleans -- and while you can argue whether is was the right plan, the bone of contention at the time was dollars -- seems a very very inexpensive solution today, doesn't it?

Gas prices are at record highs with no relief in sight. Our federal government is hemoragging red ink due to foreign entanglements and now domestic torment. Millions of our citizens have been displaced, some, perhaps, forever. Forecasters are predicting economic slowdown for the remainder of the year, with the only "winner" in this mess being those firms and individuals involved in clean-up and reconstruction.

The adage about insanity being defined as doing the same thing over and over and expecting different results comes to mind. Are we -- citizens and governments -- ready to change our behavior? Or will we continue with the same-old, same-old? The whole world is watching.

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