Are more Katrinas on the Horizon? The devastation wrought by hurricanes Katrina and Rita will bring higher insurance rates. But longer-term, insurers need to better understand and address the rising risks many believe are being amplified by climate change.

• Author: Marshall, Jeffrey
• Position: Insurance

Perhaps it was prophetic: the fall meeting of the National Association of Insurance Commissioners (NAIC) was scheduled for Sept. 10-11 this year in New Orleans. Needless to say, it was canceled.

Hurricane Katrina's mind-numbing devastation in the Crescent City came as the NAIC, a collection of state insurance chiefs, has been thinking about the increasing risks to insurers from natural forces like hurricanes, drought and lightning. In effect, the commissioners are elevating climate change--that elusive and complex set of forces--to the forefront of issues they believe that insurers must come to grips with in the years ahead.

"If insurers are engaged on this issue, and I think they can be, there will be a significant change in their approach to climate change," said Joel Ario, Oregon's insurance administrator, in a September teleconference about the issue. "They need to be fully engaged in collecting data and projecting potential losses."

Tim Wagner, Nebraska Department of Insurance director and chair of the NAIC's Property and Casualty Committee, notes that more than hurricanes are at issue. There have been record droughts in the West and Midwest, he notes, and while central Europe experienced floods recently, there were fires in Portugal. "While the insurance industry is well-capitalized now, it's clear that we need to focus on financing risk [management] for these events," he says.

This is a paramount issue for insurers and their reinsurance partners, of course; estimates by October for insured losses from Katrina alone were running at between $40 billion and $60 billion, which would make it the biggest insurance catastrophe of all time. But as the losses ripple through the insurance world, they will surely impact corporate policies as well. Indeed, a report by Moody's Investor Service Inc. in late September concluded that corporate insurance rates would rise back to 2003 levels, or higher; they had declined for two years.

Vincent Vitkowsky, a partner in the Insurance and Reinsurance Department with law firm Edwards & Angell, notes that dozens of lines of business can be implicated in a major catastrophe like Katrina, running from business interruption to cyber-risk.

The most likely candidates for steep increases, not surprisingly: energy companies in the affected areas, with their production facilities and refineries battered by the storms. Annual premiums could be jacked up anywhere from 20 to 50 percent for these companies as the...