Storm warnings: climate change hits the insurance industry.

• Author: Flavin, Christopher
• Position: Cover Story

Staggered by an unprecedented series of hurricanes, floods, and fires, insurers are weighing the possibility that these catastrophes are the first real effects of human-induced climate change--and that the worst is yet to come. Their response could pit them squarely against the giant fossil fuel industry in the battle over reducing carbon emissions.

During 1993, a series of headlines in major newspapers described an insurance industry in crisis, as weather-related disasters led to billions of dollars in insurance claims. "Storm Loss New Blow to Insurers," proclaimed The New York Times. "As Insurance Costs from Hurricanes Soar, Higher Rates Loom," warned The Wall Street Journal. And London's Financial Times offered a succinct explanation: "Global Warming Makes Insurers Sweat."

The headlines were hardly an exaggeration. Between September 1989 and September 1994, the world experienced at least 15 separate weather-related disasters in which financial losses exceeded $1 billion. Among the events that created the greatest alarms were Hurricane Andrew, the most damaging storm in U.S. history; several huge cyclonic storms in Asia; a series of ravaging wind storms in northern Europe; two enormously destructive fires in California; and the worst flood ever seen on the Mississippi River.

The very term "natural disaster" suggests that this litany of financial losses should be written off as a bizarre coincidence we can do little about. But a growing body of scientists, as well as experts within the insurance industry itself, are beginning to consider the possibility that human society is not only a victim of climatic events, but a causal agent as well.

In some ways this is inarguable. Coastal housing developments, levees that alter flood plains, and fire suppression programs that allow the buildup of combustible materials all contribute to the frequency or severity of weather-related disasters. But such actions merely increase vulnerability to incidents of extreme weather, once they occur. On a more profound level, scientific evidence now points to the possibility that human-induced changes to the atmosphere may increase the frequency or severity of the incidents themselves--including hurricanes, droughts, and wild fires.

It is too early to know for sure if the recent spate of disasters is related to the ongoing buildup of greenhouse gases in the atmosphere. But people in the insurance industry are looking at the question closely, since their entire business is founded on historically based probability calculations that would have to be overhauled if insurers are no longer able to assume that weather in the future will be similar to past weather. Indeed, a suddenly less stable, more extreme climate could make the world's insurance companies as vulnerable as the flimsiest Caribbean bungalow.

Franklin Nutter, President of the Reinsurance Association of America, sums up his industry's dilemma this way: "The insurance business is first in line to be affected by climate change...it could bankrupt the industry."

The entry of the $1.4 trillion-a-year insurance industry into the debate over global climate change could mark a watershed. Even as national governments and international agencies have begun to focus on strategies to reduce greenhouse gas emissions, public discussions have been shaped in part by the voices of skeptics who argue that because we cannot fully predict the timing or magnitude of climate change, policy responses should be delayed.

To insurance executives, however, this is a strange argument, since all of their business--indeed, its very nature--involves making important investment decisions in the face of large uncertainties. Indeed, they have effective tools for quantifying the financial risk involved in possible future disasters--even if the probability of a particular event is small. To an insurance executive, the very uncertainties associated with climate change may be the best reason for taking it seriously.

STORM WARNING

During the past few years, the world's television screens have been filled with the spectacle of one natural catastrophe after another. A collection of press reports compiled by the environmental group Greenpeace from six continents between 1990 and 1994 displays a remarkable litany of the highest floods, longest droughts, most severe wild fires, and worst heat waves ever recorded. A December 1993 report in The New York Times science section summed up many people's' gut reaction in simple terms: "This Year's Weather: It Really Was Strange." That feeling continued in 1994, which witnessed the hottest summer in some parts of Europe since the eighteenth century, and severe droughts throughout East Asia.

Tropical hurricanes, cyclones, and typhoons--as they are variously called in different parts of the world--are among the most widely destructive and life-threatening of natural disasters. These large, swirling storms, which have their genesis in warm tropical waters--in areas such as the Caribbean, South Pacific, and Indian Ocean--can pack winds of between 120 and 300 kilometers per hour, and cause storm surges that inundate low-lying coastal areas.

Since the late eighties, hurricanes have struck various parts of the world with alarming frequency. In May 1991, for example, a "cyclone" with winds of 270 kilometers per hour struck Bangladesh, flooding vast areas of the country's fiat coastal plain. An estimated 139,000 people were killed, more than a million homes were damaged or destroyed, and financial losses were put at $1.8 billion--nearly 10 percent of Bangladesh's annual GNP.

Four months later, southwest Japan was struck by the sixth strongest storm ever recorded by the Japan Meteorological Agency. Although it barely missed some of Honshu's most densely populated areas, Typhoon Mireille damaged thousands of homes and yielded nearly $5 billion in financial losses.

Within the next year, at least five devastating tropical storms caused billion-dollar-plus losses in locations ranging from China to Pakistan and Hawaii, where Hurricane Iniki, with sustained winds of 210 kilometers per hour, destroyed 10,000 homes and 70 hotels. Total losses: $2.1 billion. Most recently, in August 1994, China was hit by Typhoon Fred, which killed 700 people and caused $1.6 billion in damage.

Even amid all these storms, Hurricane Andrew was--from a financial standpoint--the tempest no one will forget. Striking south Florida on August 24, 1992, Andrew packed sustained winds of 230 kilometers (145 miles) per hour and was the third most powerful hurricane to make landfall in the United States in the twentieth century. Missing the region's largest urban centers, Andrew still virtually flattened some 430 square kilometers of Dade County Florida, destroying 85,000 homes and leaving almost 300,000 people homeless.

Total losses from Andrew were estimated at $25 billion, equivalent to the combined losses of the three most costly storms to strike the country previously. Only the warnings of the National Hurricane Center (which was directly hit by the storm) and local officials kept the death toll to just 55.

Tropical storms were not the only natural disasters to cause extensive damage in the...