Climate change and storm damage: the insurance costs keep rising.

In the article "Storm Warnings," in our November/December 1994 issue, we noted a striking development in the escalating debate over global climate change: the growing concern of the insurance industry.

By the time we ran that story, many atmospheric scientists had already reached a consensus that increases in the concentration of greenhouse gases would raise the average temperature of the earth's atmosphere. Since then, evidence of human-induced climate change has been confirmed, and several scientific studies found that this warming may already be increasing the frequency and severity of storms and other weather disturbances.

Insurance companies, which have to pay for much of the damage caused by such "improbable" events as 100-year storms that occur three or four times in a decade, had taken heavy losses from such events in the early 1990s and were suddenly realizing their vulnerability to climate change, according to our 1994 article. We quoted Franklin Nutter, President of the Reinsurance Association of America, who said: "The insurance business is first in line to be affected by climate change....[It] could bankrupt the industry." One implication of our story was that the insurance industry might throw its considerable weight - and experience in the management of risk - into the battle to cut back human-caused carbon emissions.

In the more than two years since the article appeared, insurance industry worries about this problem have continued to grow. In fact, worldwide weather-related financial losses (not all of them insured) reached a new high of $38 billion in 1995, continuing a string of disaster-prone years in the 1990s (see graph). In the first half of the decade, insurers paid out $57 billion for weather-related losses worldwide, compared with $17 billion for the entire decade of the 1980s.

The weather disasters of 1995 included Hurricane Opal, which cost $3 billion in the southeastern United States, winter floods in Europe that cost $3.5 billion, flooding in southern China that cost $6.7 billion, and floods in North Korea that cost $15 billion and left millions of people on the brink of starvation. The insurance industry was spared the full brunt of these last two disasters only because neither China nor North Korea have much insurance - which leaves businesses and individuals there even more vulnerable to disaster.

Although complete figures for 1996 are not yet in, it appears to have been another bad weather year. Flooding in southern China was even more severe than that of 1995, causing $26 billion in damages and killing more than 3,000 people. And in November, India was hit by a devastating cyclone that killed 2,000.

As we pointed out in our 1994 article, it is impossible to directly link any particular storm to human-induced climate change, but the sudden rise in the frequency and severity of such disasters has convinced many insurers that human activities may have played a role.

The dilemma for insurers is that their rates and coverage policies are based on the law of averages. In the case of weather-related coverage, they assess past trends and assume that the frequency of catastrophes will stay the same. But climate change could render those calculations useless - and perhaps already has. In response, many companies are reducing their exposure in coastal and island real estate, wildfire-prone regions, and valleys vulnerable to flooding. Areas of southern Florida and the Caribbean, for example, have become virtually uninsurable. If such trends continue, either governments will have to step in as insurers of last resort or society will lose a vital buffer against disaster.

Fortunately, many insurance companies are taking a more proactive approach to this problem. For example, in August 1996, 13 large re-insurance companies formed a new Risk Prediction Initiative to be run by the Bermuda Biological Station for Research. This initiative will allow insurers to wor-

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with scientists to better understand the historical storm record and to develop improved tools for forecasting the effects of future climate change.

More significantly, at the July 1996 Conference of the Parties to the Convention on Climate Change in Geneva, a large delegation of insurers turned up for the first time. Under the auspices of the U.N. Environment Programme, some 60 insurers, including multi-billion dollar companies such as General Accident, Swiss Reinsurance Company, and Sumitomo Marine & Fire Company, signed a statement calling on governments to substantially reduce emissions of climate-altering greenhouse gases.

These insurance companies have indicated that they now plan to actively monitor - and perhaps even lobby on - the climate change issue. If so, they will serve as a powerful counterweight to the oil and coal industries, whose products are the sources of most human-caused carbon emissions, and who continue to spend heavily on efforts to impede international climate negotiations and discredit the scientists who brought this problem to public attention in the first place.