Insurers for Insurers Calling for Climate Action
In a testimony to the Senate Committee on Environment and Public Works on July 18, 2013, Franklin Nutter, President of the Reinsurance Association of America, called on federal legislators to stimulate climate mitigation and adaptation. The price tag for the insurers of insurers is becoming too large.
Reinsurance protects insurance companies against risk. If an insurer sells 1,000 policies each with a maximum protection of $1 million, that insurer could lose up to $1 billion in the event of a large disaster (1,000 policies x $1 million per policy). The possible risk may be too much for the insurance company to live with, and it looks to other companies to take up the risk in the same way we call on Geico or State Farm to protect ourselves against, for example, a car accident or a house fire.
Reinsurers are large players in the insurance industry and critical for helping people and companies rebound after devastating events. Superstorm Sandy caused an estimated $18 billion in insured losses. Reinsurers will likely pay about 40 percent of that. In 2005, reinsurers doled out 45 percent of the insured losses from hurricanes Katrina, Rita, and Wilma.
Reinsurers are in the business of protecting against extreme events and see climate change through that lens. In recent years, the toll caused by disasters such as Katrina, Superstorm Sandy, and the drought in the Midwest last summer have been weighing on the minds of people like Nutter. For good reason, losses due to disasters have been on the rise. The number of federal disaster declarations issued by the Federal Emergency Management Agency (FEMA) between 1953 and 2013, for example, set new records in 2010 and 2011. The number of disasters each year averaged over the last 10 years (2002-2012) was 63, and has increased nearly every 10-year span since record keeping began (see figure). This trend does not bode well for future reinsurance payouts, especially since the concentration of people and property in climate-vulnerable areas, like those susceptible to hurricanes and storm surges, are expected to rise in coming year. In 2012, New York and Florida combined to have about $6 trillion of insured assets alone.
While there is some evidence that extreme events are on the rise, the statistics are still inadequate to attribute to human-caused climate change. Extreme events are by definition rare occurrences and it is therefore more difficult to understand if increased greenhouse gases in the atmosphere cause them, or if natural climate variations do. Outside of observational evidence for increased intensity and/or frequency of extreme events exists a solid theoretical foundation for the intensification of the hydrological cycle in a warming world. The physical law known as the Clausius-Clapeyron relation determines that for every 1 degree Celsius increase in atmospheric temperature, the air can hold 7 percent more water. This relationship has many speculating that global warming will cause greater floods, even if such trends are not yet visible in the data. When it comes to temperature extremes, we don’t need to call on theory, we can simply look at thermometers. Temperature records have been broken in recent years at a break-neck pace all over the globe. Increasing temperatures by themselves influence extreme events like heat waves, wildland fires, and droughts. Looking forward, a recent study on climate change impacts conducted for FEMA concluded that sea-level rise of 4 feet—projected to be reached near the end of this century—would expand 100-year floodplains in coastal areas by 55 percent: a substantial increase in risk for an agency whose National Flood Insurance Program currently carries a $26 billion debt.
While there is uncertainty in all future projections, it’s not enough to make Frank Nutter pause. Rather, in his testimony on behalf of the U.S. Reinsurer Association he made several recommendations to the Senate, including:
- provide tax credits to individuals for specified mitigation and resiliency actions associated with extreme weather and climate change;
- reform the National Flood Insurance Program to reflect extreme weather and climate risk in its insurance rates;
- purchase or relocate properties near coastal or river areas at repeat risk;
- require the Army Corps of Engineers to assess climate risk for all projects;
- use disaster assistance as an incentive for local communities to engage forward-looking recovery that is informed by climate and extreme weather risks.
These and other recommendations will help people minimize the devastation caused by catastrophic events, and in the process minimize costs transferred to consumers from an insurance industry overrun by insured losses. While insurance has its flaws, the fact that reinsurers are now concerned about climate change will hopefully push decision makers to craft sensible policies that help protect us and future generations from extreme events.
Read Franklin Nutter’s full testimony on the Senate’s Environment and Public Works website at 1.usa.gov/19eg3Rf