Sallie Kraus on Insurance Implications of Climate Change: Tornadoes are not Just in Kansas Anymore--a Discussion on Whether Severe Storms are a Harbinger of Climate Change and How the Insurance Industry can Respond
We may think of tornadoes as a phenomenon limited to the Midwestern Plains as in the “Wizard of Oz,” but this year they have cut a swath from Texas to Virginia. The spate of severe spring tornadoes in the US, coupled with forecasts of an active hurricane North Atlantic season this year have made weather an even more popular topic of conversation than usual in the U.S. Disasters abroad have added to the atmosphere of concern among domestic and multinational carriers this year.
While tornadoes have wreaked havoc this year, they may just be the opening act for the hurricane season, which has historically produced the largest insured losses. The largest hurricane loss in history was Hurricane Katrina, a $41.1 billion in insured event in 2005.
This year's hurricane season that officially began June 1, is predicted to be well above average with a total of 15 named storms. Even if the 2008 hurricane season produces only a normal number of average intensity storms, many industry observers think this will be a tough year for many insurers.
Just as the local weatherman may be wrong about the forecast for a particular day, seasonal hurricane forecasts are subject to change. Thus, some climatologists find a comparison of seasonal forecasts to actual five year storm data to be more instructive.
In this article, Sallie Kraus, an attorney specializing in coverage litigation involving environmental, toxic tort and product liability claims, and currently a claim consultant at SCOR Re, explores some of the alternate financial and insurance products as well as some legislative initiatives that are being considered to address the challenges presented by climate change.
The author writes: “To address climate change, cat modelers and insurance professionals will have to blend traditional and well developed short term weather modeling techniques with much less developed long term climate modeling. Models have their weaknesses and are not without controversy. Some experts and regulators argue that carriers are too reliant on models, especially since Katrina. However, other industry observers say that carriers are able to critique weaknesses in the models and use them with caution.”
The author discusses some of the new capital-based vehicles are available to underwrite climate-related risk, the many financial developments taking place in the emerging emissions markets that are adjunct to the insurance industry, recent legislative initiatives in the United States that represent the first steps in a U.S. market approach to emissions trading, as well as initiatives from organizations such as the International Trading Association and the International Finance Corporation will have an impact on industries that produce greenhouse gases around the globe.
The author also addresses the court cases in which climate change was the alleged culprit as well as the significant body of literature that discusses which lines of business are likely to be affected by climate change and the types of coverage issues that are likely to be raised. The author states: ”Clearly, there is both risk and opportunity in addressing climate change. Risk, comes in the form of more losses and erosion of profits. Opportunity, however, comes in a myriad of ways. Carriers are taking advantage of their influence to mitigate risks by encouraging mitigation and better construction. They have also “gone green” by developing not just new products, but new approaches to doing business. This ranges from encouraging green construction to charging for car insurance according to the number of miles driven.”
The author concludes: “these improvements are so far incremental, but represent a real effort to address the various challenges posed by weather and climate change.”