The weather. Everyone talks about it, but no one ever does anything about it. This somewhat tongue-in-cheek colloquialism was once merely that: we think of ourselves as being subject to the whims of nature. We may find, however, that this generationally repeated observation is, for our generation and those that follow, untrue.

The footprints reflecting these conclusions can already be seen. The seven largest economic losses from natural catastrophes all occurred in the last seven years. Of the seven, five are wind and water related: the U.S. floods of 1993; Hurricanes Andrew, Muriel, Hugo; and the European storms of 1992. Munich Reinsurance reports that in the last 10 years the number of natural catastrophes is four times greater than in the 1960’s, economic losses are eight times greater, and insured losses 15 times greater, even adjusting for inflation.

Without doubt the human related factors contributing to the increased economic and insured losses are prominent: growth in population and property values, increased value of personal belongings, increased concentration of people and property in areas at great risk to natural catastrophes – particularly along coastal areas, the questionable management of rivers which allows people to live and work in high risk areas, drainage of wetlands, logging and farming which have eroded watersheds and the use of less resistant building materials and methods.

Insurers’ Interest in Climate

Our interest, that of the worldwide property/casualty insurance industry, is interdependent with climate, seismic activity, and weather. The risk of natural events drives the demand for our products, while at the same time threatening our financial viability. The economics of insurance depend upon our global environment at a time of increasing concern about rapidly changing climate and increased risk of earthquakes. In this respect, the fact that our industry thrives or dies on its ability to make estimates of the financial impact of future events puts us at great risk.

In response, it is incumbent upon us to assimilate our knowledge of the natural sciences with the actuarial sciences – in our own self interest and in the public interest. If climate change is significant but climate trends are difficult to detect, historical data on catastrophe losses is not only uncertain but, according to Gerhard Berz of Munich Re, it is even misleading. Public policymakers, insurers, and the public need to understand more about climate because of the extraordinary consequences of adopting the wrong policies and practices or, worse, delaying adopting meaningful policies or practices related to hazard mitigation, preparedness, or financing the cost of recovery.

Global Warming and the IPCC

Our earth has a natural greenhouse environment, keeping it 33° Centigrade warmer than it would otherwise be. Without it, life as we know it could not exist. Until recently, international climate scientists were reluctant to draw conclusions about changes in climatic systems due to increased global warming. They were concerned about the uncertainly of computer simulations, that the evidence was problematic, and they simply felt that they did not know enough.

But in late 1995, the International Panel on Climate Change, reflecting the consensus views of 2,500 of the world’s climate scientists, drew a very definitive conclusion that we are in a period of great climatic instability which could lead to "…widespread economic, social and environmental dislocation over the next century." The Panel notes that (I) the rate of global warming over the past 30 years is greater than any prior period; (ii) over the past 100 years, roughly since the dawn of the industrial revolution, the earth’s surface has warmed one-half degree Centigrade; and (iii) the 10 hottest years on record have all occurred since 1980.

The IPCC predicts that over the next 100 years the earth will warm from 1.5 to 6.3 degrees Fahrenheit, and that sea level will rise between 6 and 38 inches – roughly the same amount of change in the next hundred years as has occurred over the earth since the last Ice Age nearly 10,000 years ago. The result of this warming, the Panel notes, is greater frequency and intensity of droughts, geographic spreading of diseases more common in warmer climates, the retreat of mountain glaciers, storms of greater malevolence and more intense wet and stormy conditions. This latter phenomena has already been cited by the U.S. National Ocean and Atmospheric Administration which states with a 90 percent probability that we are already experiencing more extreme weather events. In the words of Tom Karlof the National Climate Data Center, "When it rains, it pours" – literally.

The debate to date about global warming is not so much about the conclusions and predictions. It is instead about whether the rise in warming of our planet is due to natural variability or human intervention. The IPPC takes a clear stand in favor of "discernible human influence on global climate." In essence, some element of "natural" disasters are, in fact, man-made. People have become a "geological force." Noting its concern over some "irreversible" effects of global warming, the IPPC recognizes that there may be winners and losers with respect to the effect of changing climate and there are likely to be some "surprises" and unanticipated developments. There are questions. How will the earth’s climate system respond or adapt to changes in temperature, precipitation, sea level and extreme events? How quickly will this take place, and what effect regionally can be anticipated?

The concern for our industry about these conclusions and the answers to these questions is that the ranges of climate change which are predicted could have occurred in the past, but did so over centuries or even millennia, thus allowing natural adaptation. For an industry such as ours, which is dependent upon its ability to predict or project future costs, the combined effect of increased property values, large increases in population and changing climatic patterns, whether caused by natural variability or enhanced by the activities of mankind for the first time in the history of the earth, is a real dilemma. What if, for the first time, the pattern of our climate is neither linear, that is, one natural event after another, nor cyclical, that is, the same climatic patterns over and over again (albeit over vast time periods).

An Industry Strategy

 Some international insurers have drawn clear conclusions about our climate and global warming. For Munich Re, there is "no doubt" that the number and intensity of windstorms, thunderstorms and floods are attributable to rapid increases in warm air and sea temperatures. The culprit, they note, is global warming. U.K.-based General Accident states that weather patterns are changing and will continue to do so at an increasing level. Swiss Reinsurance has publicly stated that the scale and frequency of weather-related events is increasing dramatically as a result of global warming. Sixty insurers have signed a statement under the auspices of the United Nations that they are "committed to work together to address…climate change."

Their advice is that in a period of increasing confidence in an assessment of the effect of global warming on climate and weather, scientific certainty – which some advocate before taking any action – is ill-advised. Scientific assessment will and should continue but, as an industry, we should not postpone reasonable and appropriate measures.

With respect to natural catastrophe exposures, including earthquakes, wind and water related, I offer the following as those appropriate measures (some of which are being pursued already):

• Full recognition of catastrophe modeling and prospective loss costs as invaluable financial tools, premised on examining catastrophe exposure – not catastrophe experience alone. While recognizing the evolving nature of this science, regulators, insurers and analysts should fully embrace their use.

• An insurance rating system reflective of the scientific knowledge of climate and climate change and seismic assessment. The recognition, if you will, of the role that natural science has in partnership with actuarial science.

• Rate adequacy for catastrophe exposure based upon catastrophe experience.

• Regulatory approval of policy coverage options including deductibles, exclusions and caps on coverage. It is in the interest of the insured to carry higher deductibles and co-insurance due to the infrequency of actual losses and the value of improved affordability.

• Premium discount for mitigation measures taken by policyholders and the communities in which they live.

• Insurance rates reflecting construction standards and materials that mitigate catastrophe exposure.

• Insurers should encourage appropriate building codes and aggressive enforcement of codes, such as the system developed by the Insurance Institute for Property Loss Reduction and Insurance Services Office, now being implemented by the ISO through the community-grading system.
• An insurance communication network from companies to policyholders and insurance organizations to the public to provide more education about climate and weather risks and seismic exposure and steps they can take to reduce this risk.

• Support of government programs related to weather and climate research and monitoring. Currently, the United States Global Climate Research Program, operated by NASA in coordination with other U.S. agencies, is threatened with budget cut-backs that, in the words of the American Meteorological Society "…would have serious detrimental impacts on increasing accuracy of weather forecasts and warnings, on seasonal to inter-annual predictions and on our overall understanding of climate variability." NASA’s Mission to Planet Earth, a satellite system operating pursuant to the Earth Observing System, is an important resource upon which our industry depends. Preservation of funding for these programs should be a critical objective in our public policy agenda.

• Support research of building materials and designs to improve the ability of structures to withstand natural catastrophes such as the program being undertaken by the IIPLR.

• Support for the research efforts of several international insurers to address climate risk and its role in the strategic future of our industry.

• Support for and study of the research findings of the Risk Prediction Initiative, a part of the Atlantic Global Change Institute in Bermuda. The RPI is addressing the question: "Would you be worried if the past was a poor guide to the future?" Taking a new approach of assimilating statistical analysis of climate patterns with computer models based on physical laws, the Institute funds predictive climate research and creates a community of scientists and insurers looking at environmental prediction. U.S. insurers involved include General Reinsurance corporation, Employers Reinsurance Corporation, The Chubb Group, Zurich Reinsurance Centre, Inc., American International Group, and Tillinghast.

• Study opportunities to incorporate energy efficiency into business practice and product strategy. Dr. Evan Mills of the Center for Building Science, The Lawrence Berkeley National Laboratory, U.S. Department of Energy, recommends that the industry encourage our customers, through premium differentials, to:

1. adopt technologies that increase energy efficiency and have the potential to reduce health and property losses;
2. participate in research for the commercialization of energy-efficient technology;
3. operate our own buildings in an energy-efficient manner;
4. foster energy-efficiency in financing or purchasing buildings;
5. create new insurance products for energy service companies;
6. work with research and development programs and energy regulators in the identification of safety enhancing aspects of energy-efficient technologies;
7. encourage energy-efficient improvements in the rebuilding or retrofitting of existing structure; and
8. review existing new construction applying standards for energy efficiency and safety opportunities to reduce risk of insured loss and improve energy-efficiency.

• Recognizing the difficulty of accurately predicting and perhaps even detecting climate change on a local, regional, national basis, and certainly on the basis of individual catastrophic events, study and recognize global, not just regional, weather and climate patterns as a component of exposure analysis.

Global warming – it is not just hot air. The industry has recognized that with respect to seismic exposure, climate and weather-related natural catastrophes, the paradigm has changed. The past may not be, indeed probably is not, prologue. But what unfolds slowly or without warning is usually not urgent. Will we only do the right things after we have exhausted all other possibilities? Or will we take those steps that are admittedly, in our self-interest but also serve the public interest.

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