Insurance industry grapples with impact of climate change

Janet Whitman in CNBC writes about the pressure on insurance company profits, in a story that illustrates why the insurance business is so unforgiving. A company can write policies that look profitable year after year, only to have all those profits and more vanish in a big loss year like this one. Or, as an investment banker once told me, insurance companies are really hedge funds with an unfortunate addiction to writing insurance: As a surge in catastrophic weather events leads to billions of dollars in claims, climate change may pose the insurance industry’s biggest problem — and profit potential. An unusual onslaught of floods in Mississippi, tornadoes in the Midwest, drought and wildfires in Texas and earthquakes abroad has wiped out hope of much profit for many insurance and reinsurance companies this year.

Natural disasters, including Japan’s earthquake and tsunami, have left the industry on the hook for $60 billion in the first six months of this year alone, according to data from reinsurance giant Munich Re. That’s nearly five times the first-half average since 2001, and the oftentimes costly hurricane season is just getting underway.

Although the damage has been worse than expected, the industry has plenty of capital set aside to weather the losses — barring the occurrence of more off-the-charts disasters, which insurers and reinsurers say may or may not be linked to global warming.

“Many companies that write large catastrophe risks, primarily reinsurance companies, are getting paid money in many years when nothing happens,” says Matthew Rohrmann, an insurance industry analyst with Keefe, Bruyette & Woods. “There really haven’t been that many devastating hurricanes over the past few years, for example, and reinsurers and insurers are still getting paid premiums. They may lose a lot of money in one year, but their pricing is based on many years.”...

Turner's "Shipwreck of the Minotaur", oil on canvas, Calouste Gulbenkian Museum, Lisbon