Sunday, December 6, 2009

Insurers assume that the future will be like the past. Now, it may not

Ian McGugan in …Insurance companies in the property and casualty sector are the firms that will be most directly affected by climate change. If global warming is as frightening as some people expect, insurance companies are the guys who will be picking up the tab for damages caused by floods, hurricanes and wildfires. They are also the ones who will also be making big bucks writing insurance against such disasters.

No wonder that buttoned-down insurers such as Allianz Group, Lloyd's of London and the Association of British Insurers are at the forefront of the green brigade clamouring for a deal on carbon emissions at the Copenhagen summit. You won't find any more sincere advocates for environmental awareness. Insurers know that if global warming results in a string of natural catastrophes, some of them will not survive.

Especially horrifying to many insurers is the unpredictable nature of what lies ahead. Evan Mills, a scientist with the U.S. Department of Energy and a long-time researcher into the connection between insurance and climate, argues that there has been a dramatic increase in extreme weather events in recent years. "Extremes are becoming the norm," he writes. He points to the European heat wave of 2003, which he calculates was a once-in-10,000-year event by historical standards.

…Insurers are rushing to introduce new products. The simplest of these products are innovations such as home insurance that provides money to rebuild or renovate homes to green standards. More complex products let customers bundle carbon offsets in with standard auto insurance or insure carbon-storage sites against the danger of leakage.

…One method is through catastrophe bonds, or cat bonds, that shift the risks of natural disasters away from insurers and on to investors. A catastrophe bond typically offers to pay investors a premium rate of interest. The catch is that if a specified disaster occurs, investors lose part or all of the money they've invested….

Hurricane Wilma, October 19, 2005

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