Insurance and climate change

The anticipated global warming during the next few decades may affect the frequency and/or intensity of heat waves, droughts, damaging hail, tropical cyclones, snow shortage in ski areas, asthma, etc. Any regionally specific predictions are highly speculative, yet because some effects may have dramatic consequences, in particular on agriculture and residential developments along coasts, the (re)insurance industry is trying to adapt.

Traditionally insurers have responded to changes in risk in these ways - restricting cover, transferring the risk (e.g. by reinsurance), raising premiums, withdrawal from high-risk areas. However any adaptive measures usually are taken after a major disaster, not before. For instance, property premiums along the US Gulf and Atlantic coasts rose sharply after the most expensive hurricane in history, Andrew (1992), made landfall. This a posteriori adaptation is especially unattractive in the case of climate change. A better procedure is risk management, adopted in anticipation of perceived hazards. Risk management involves four strategies -

1. encouragement of preparation for disaster mitigation by policyholders,
2. endorsing codes and regulations which reduce the damage to exposed policyholders,
3. involvement in public education about the perceived threat, and
4. support of research applying theory to specific threats.

These strategies fall short of supporting initiatives to reduce the risk, i.e., in the case of global warming, urging a reduction of greenhouse-gas emissions.

(1) Leigh, R. 1998. Adaption to climate change - a role for the insurance industry? Natural Hazards Quarterly, 4, p2 (available from the Natural Hazards Research Centre at Macquarie University, Australia)