Citation: Sharon Beder, 'Insurers Sweat Over Global Warming', Engineers Australia, August 2001, p. 41.

This is a final version submitted for publication. Minor editorial changes may have subsequently been made.

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Last month the Intergovernmental Panel on Climate Change, consisting of hundreds of the worlds top climate scientists, published its latest report. The 2,600-page UN report found that the planet is warming faster than they had previously predicted as a result of industrial pollution and that the human consequences are likely to be catastrophic.

The Panel concluded from its detailed and comprehensive analysis of temperature and weather data that the earth is experiencing an unprecedented period of climate instability as a result of warming caused by greenhouse gas emissions.

The insurance industry is all too aware of this climate instability having suffered billions of dollars in losses over the past decade from storms, landslides, flooding and droughts. The costs of 'natural' disasters of this type have been escalating since 1987 causing insurance companies to form coalitions to lobby for government action to reduce greenhouse gas emissions. In July 1996 a large delegation of insurers attended the conference on Climate Change in Geneva and they have been active ever since.

The Reinsurance Association of America (RAA) pointed out in 2000 that 50 percent of the insured losses throughout the world over the previous 40 years that were due to natural catastrophes had occurred since 1990. Insurers paid $57 billion for weather-related losses in the first half of the 1990s compared with $17 billion for the whole of the previous decade. In July the Red Cross warned that weather-induced disasters had increased sharply worldwide in the late 1990s, from 200 a year before 1996 to 392 in 2000.

In 1998 alone weather-related catastrophes claimed 50,000 lives and cost an estimated $93 billion. Of these losses only $15 billion were insured. Munich Re, one of the world's largest reinsurers (providing insurance for insurance companies), estimates that climate change could cost more than $300 billion dollars a year in decades to come.

The problem for insurers is that their rates and coverage policies are based on past trends and averages and historically-based probabilities that are rapidly becoming redundant. Climate change that results from global warming makes their predictions meaningless and poses a serious threat to their future profitability and viability.

A few insurers are finding ways to profit from global warming by offering businesses insurance against loss of business that results from climate change. One such firm, Element Re, a provider of "weather risk management products" has just done a deal with Atmos Energy Corporation in the US, which is a gas distributor. The policy provided by Element Re, insures Atmos against revenue loss from warmer winter temperatures in cities across the US.

However the ability of insurance companies to continue to insure for extreme weather events is much more questionable. Many insurers are now refusing to insure parts of southern Florida, Hawaii and the Carribean. If this trend were to continue then the costs of natural disasters could become a governmental responsibility. However the costs of weather-related incidents are increasing 10% each year, much faster than national GDP and the ability for governments to cover them will diminish over time.

The alternative is for the burden to fall on individual victims. This already happens in developing countries, where there is often no compensation for loss of life and property. In its annual World Disasters Report the International Federation of Red Cross and Red Crescent Societies said that "Recurrent disasters from floods in Asia to drought in the Horn of Africa, to windstorms in Latin America, are sweeping away gains and calling into question the possibility of recovery".

The Red Cross noted that "international aid will not be able to keep up with the impact of global warning" and that in any case, many aid dollars tend to find their way back to donor countries through fees paid to foreign aid consultants. It suggested that in future "poor countries might seek legal compensation [from countries causing global warming] to pay for reconstruction through an 'international tort climate court'."

A report published by the Chartered Insurance Institute (CII) in the UK estimates that, if nothing is done to stop global warming, economic losses from extreme weather will be larger than global GDP by 2065. This puts into perspective the costs of preventing global warming, which amount to only a small percentage of GDP.