The Rising Costs of Global Warming
by Patrick Tucker
As global temperatures rise, the insurance industry prepares for the
worst.
Historically, the debate on global warming has been dominated by two
competing sets of concerns. On one side, environmentalists and the reputable scientific
community have, for decades, warned of the ill effects of climate change, including the
increased frequency and intensity of storms and the higher likelihood of disease. The U.S.
Environmental Protection Agency (EPA) has forecast a 10 to 12-inch rise in sea levels
during the twenty-first century. Researchers at Columbia University have predicted that
ozone-related deaths in urban centers like New York will increase by at least 4.5%.
On the other side of the debate, business leaders have pointed out that
reducing greenhouse gas emissions would slow economic growth, resulting in job losses and
poverty.
Up until recently, the costs of global warming in economic terms have
been seen as smaller than the costs of reducing emissions. That perception, has begun to
change according to a rising chorus of economists and insurance experts.
Evan Mills of the U.S. Department of Energy's Lawrence Berkeley
Laboratory states that the world's total economic losses from weather-related catastrophes
has risen to 25% of all insurance losses for the last decade. The effect has been
especially dire in the United States, which incurred 40% of the total insurance losses
during the 1990s.
"Global weather-related losses in recent years have been trending
upward much faster than population, inflation, or insurance penetration, and faster than
non-weather-related events," Mills writes in an article that appeared in the journal Science.
"Damages from U.S. storms grew 60-fold to $6 billion a year between the 1950s and the
1990s. As the climate changes, populations are moving into harm's way, but demographic
factors do not appear to explain all of the increase."
According to Mills, the economic costs of weather-related events were
felt across a variety of sectors, professions, and industries totaling $1.4 trillion from
1980 through 2004. The insurance sector was particularly hard-hit during that period,
losing more than $340 billion to environmental disasters. These numbers, Mills believes,
are probably underestimated.
According to the EPA, the high monetary cost of these events is due two
seemingly contradictory trends. The first and more substantial of these is a measurable
increase in the number of hurricanes, mud slides, floods, etc., taking place each year.
Four times as many natural disasters occurred during the 1990s as in the 1950s. At the
same time, people are relocating to the sun-drenched shores of places like Florida and
California at the rate of 1,000 per day. This, in turn, has substantially increased the
value of the property most likely to be affected by hurricanes and rising sea levels.
Trends in the insurance industry often forecast broader occurrences
across the global economy. The availability of insurance helps particularly developing
nations grow by decreasing the financial risks for potential investors. The market for
insurance products in the developing world ($400 billion in annual premiums) is growing
several times faster than the same market in Europe and the United States. Unfortunately,
developing nations are especially vulnerable to weather-related disasters.
The world's second-largest reinsurer, Swiss Re, has conducted extensive
research on the potential price tag of global warming. In a 2004 report, the firm
estimated that the overall economic costs of catastrophes related to climate change
threatens to double to $150 billion per year in a decade. The insurance industry's share
of this loss would be $30-$40 billion annually--the equivalent of a terrorist attack on
the scale of 9/11 occurring every year. According to some estimates, the costs of
Hurricane Katrina have already exceeded $100 billion.
The ability to calculate the economic as well as the environmental costs
of climate change will better enable companies to adopt more ecologically sound practices
and policies. "The good news is that the insurance industry has played a valuable
historical role in loss prevention," Mills states. "Insurance companies were
founders of the first fire departments, building codes, and auto safety testing protocols.
But the role they play in climate change mitigation and adaptation remains to be
seen."
Sources: Lawrence Berkeley National Lab, 1 Cyclotron Road Mail, mail-stop #65,
Berkeley, CA 94720. Telephone 510-486-4210. Web Site www.lbl.gov.
Swiss Re, Mythenquai 50/60, P.O. Box 8022 Zurich, Switzerland. Telephone 41 43 285 2121.
Web Site www.swissre.com.
