Extreme weather batters the insurance industry

A few snips from a long article by Ben Berkowitz in Reuters: …One of the biggest problems for insurers is that they have to insure increasingly valuable properties in risky areas that, by and large, are not being built with disaster risk in mind. That in and of itself is driving their risk up dramatically. When an insurer writes a policy for a property, it takes various factors into account, such as the property's location, its age, the propensity of the region it's in to be affected by weather events and the potential cost of replacing the property if it is damaged or destroyed.

Those criteria have largely stayed the same over the years, but what changed is the value of the properties to be insured and the volume of them. People around the world love beachfront houses and developers love selling them. In most places, no one stopped to think whether building the houses was a good idea, or whether there were appropriate building codes in place, or how many billions of dollars would be at stake if a major hurricane blew through.

"Even if the baseline of activity from a natural hazards point of view stays constant, the level of losses you're going to see will certainly be increasing commensurate to the increases in economic activity and national wealth," said Bill Keogh, the president of Eqecat, another major global risk modeler.

Most people in the business of predicting risk agree with Keogh that the changes in the environment matter less now than the changes in the "built environment" -- the size, value and type of buildings being put in high-risk areas like Florida's coastal zone and geologically unstable areas of California. Stringent building codes would overcome much of those risks, but such things either do not exist or are not strictly enforced in many parts of the world, and even in the United States they are a state-by-state patchwork. In many cases, it takes a disaster for them to be updated to reflect modern demands….

A house destroyed by Hurricane Ike in Shoreacres, Texas, 2008. Photo by FEMA