Stormy Weather

Insurers may have the most to gain from fighting global warming. Why aren't they more involved?


When it comes to public health and safety advances in this country, much credit must go not to altruistic legislators or advocates, but to the profit-driven demands of a single industry: insurance. Fire departments, auto safety measures and building codes are all partly the product of innovations or lobbying by insurers seeking to reduce risks and the costs of losses they must cover.

Now, some inside and outside the industry are asking whether insurers could, for similarly self-serving reasons, become a major force for change on what many scientists argue is the biggest looming threat to the public good: climate change.

Few industries, after all, stand to lose as much as insurance if greenhouse gases continue to accumulate in the atmosphere and global temperatures continue to rise, a trend most scientists now agree is well under way and which many predict will contribute to an increase in wildfires, droughts, major storms and other destructive events.

This was the message of a report released last month by Ceres, a coalition of environmental groups and institutional investors, which found that insured losses in the United States from weather-related catastrophes have increased 10 times faster than insurance premiums since 1971. These figures don't include the damage from countless smaller weather events - which in total are even costlier than catastrophes - or the damage from Hurricanes Katrina and Rita, which occurred just before the report's release and is estimated to have caused between $40 billion and $60 billion in losses for private insurers.

The report's authors acknowledge that much of the increase in weather-related losses is related to demographic trends, with more people - and more valuable properties - in areas at risk of storms, mudslides and other disasters. But their data suggest that weather-related losses have increased at too sharp a pace to be explained by demographic trends alone, and that an increase in extreme weather has also played a significant role.

And with temperatures expected to continue to increase in the coming decades, the report's authors predict a further increase in extreme weather, exacting an even larger toll on the industry.

The report cites a separate recent study by the Association of British Insurers that determined that carbon-dioxide emissions could increase average annual losses from U.S. hurricanes, Japanese typhoons and European windstorms by $27 billion a year, or two-thirds, by the 2080s.

The cost of extreme weather is expected to be even greater in developing countries, which the industry has been relying on for most of its growth.

While insurers can, in the short term, simply raise premiums and deductibles, and add limits on policies, or even pull out of areas that have grown too risky, over time that defensive approach will only contract the industry's market. Such a strategy is also less workable at a time when extreme weather is growing more unpredictable. And it would put a severe crimp on the economy, because so much business, from buying a house to drilling for offshore oil, depends on the availability of affordable insurance.

"It's not a long-term strategy to say you're going to shrink the market further and further. Insurance companies do best in a world where risk is moderate, and I can't imagine they want a world where they have to drastically cut back business," said Ceres insurance analyst Andrew Logan. "And the social implications are tremendous: They might pull out, but what does that mean for huge chunks of the U.S. population and business?"

Far more effective, the authors argue, would be for the industry to try to reduce the risk in question by putting its considerable weight behind efforts to reduce greenhouse gas emissions and thereby help slow the warming trend. There are signs that other sectors are starting to take note about climate change's potential implications for their bottom line, with even some U.S. energy companies starting to look for ways to reduce their carbon-dioxide emissions in anticipation of restrictions.

But an industrywide intervention by insurers - the world's largest industry, based on revenues, triple the size of the oil industry - could have a significant impact all its own: Not only does the industry have a major lobbying presence in Washington, but it also exerts a broad influence on corporate America, through its relationships with its commercial clients and through the investment decisions it makes with its huge financial holdings. Insurers, the argument goes, stand to offer the clearest example that fighting global warming can be a pro-business proposition.

"There is a lot of leverage they have over the corporations that are responsible for emissions. Insurers are very credible messengers on risk issues," Logan says. "If the industry were to stand up and say, `We are extremely concerned about where we as an industry and economy are going to be in 10 years,' that would carry a lot of weight."

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