Climate change futures: health, ecological and economic dimensions

100 | FINANCIAL IMPLICATIONS
demand for insurance increases at first, it evolves into
reduced willingness to pay and some shift from the use
of insurance to alternatives such as weather derivatives.
As warned by the US Government Accountability
Office (GAO 2005), private insurers encounter
increasing difficulty in handling extreme weather
events. As commercial insurability declines, demands
emerge to expand existing government-provided insurance
for flood and crop loss, and to assume new risks
(for example, for wildfires and windstorms). Cashstrapped
governments, however, find that claims interfere
with balancing their budgets (Changnon 2003)
and, in turn, limit their coverage, with the result that
more ultimate losses are shifted back to the individuals
and businesses impacted by climate change.
Compounding the problem, international aid for natural
disasters continues its current decline as a percentage
of donor country GDP (Mills 2004).
Climate change accelerates several forms of unrelated
adverse structural change already underway in the
insurance industry. 6 This manifests as a rise in competition
among insurers, significant consolidation due to
the reduced viability of small firms, increased risk
exposure via globalization and a growing proportion
of competing self-insurance and alternative risk transfer
mechanisms.
CCF-II: SURPRISE IMPACTS
A shift from gradual to non-linear impacts of climate
change serves to intensify the adverse effects of CCF-I.
Disruptions are greater and the economic cost of natural
catastrophes rises at an increasing rate, with elevated
stress on insurers and reinsurers. This scenario is
also fundamentally different for insurers insofar as
CCF-I entails relatively predictable changes that can
(to a degree) be adjusted to, whereas CCF-II involves
a substantial increase in impacts and uncertainty, significant
challenges to the actuarial processes that
underpin the insurance business.
Life and health impacts are particularly amplified in
comparison to the outcomes in CCF-I. Extreme heat
catastrophes become more common. Events on a par
with that seen in Europe in the summer of 2003 come
to the US with the result that offensive air masses of
unprecedented length range from almost 200% to over
400% above average. Intensities also exceed the
hottest summers over the past 60 years by a significant
margin. All-time records for maximum and high minimum
temperature are broken in large numbers of cities,
with corresponding death rates five times that previously
seen in typical summers. Aside from mortalities, hospitalizations
tax hospital resources in emergency
room(s) already hit hard by constrained budgets.
Also due, in part, to temperature increases, the current
trend towards increasingly damaging wildfires continues.
Both a cause and impact of climate change,
more fires set intentionally to clear forests and create
grazing land in the developing world grow out of control
(due to climate-change droughts and high winds).
Such associated events caused an estimated US $9.3
billion in economic damages in 1997 (CNN 2005).
Another bad year in 2005 forced the closures of
Kuala Lumpur’s largest harbor and most other businesses
and manufacturing plants, as well as disruption to
tourism. A continuation of the trend results in a combination
of insured losses, with causes ranging from an
upturn in respiratory disease to widespread business
interruptions. Included in the impacts are well-insured
offshore industries, based in industrialized countries.
The combination of more aeroallergens, rising temperatures,
greater humidity, more wildfire smoke, and
more dust and particulates considerably exacerbates
upper respiratory disease (rhinitis, conjunctivitis, sinusitis),
lower respiratory disease and cardiovascular
disease. Cases of asthma increase sharply. A 30%
increase in cases would occur, raising the total to
about 400 million new cases per year by 2025.
The baseline cost was US $13 billion/year in the US
alone as of the mid-1990s (half of which are direct
health care costs). If a 30% increase took place in the
US, the incremental cost of US $4 billion/year would
be on a par with that of a very large hurricane each
year.
With a continued rise in atmospheric CO2 concentrations
and early arrival of spring, a significant jump in
winter and summer warming (for example, from accelerated
release of methane), is accompanied by a stepwise
advance in the hydrological cycle, and ensuing
growth of weeds, pollen and molds. Additionally, dust
6
Even in wealthy nations, governments are increasingly seeking to limit their financial exposures to natural disasters. As a case in point, the
risk of residential flooding in the US is deemed largely uninsurable, which has given rise to a National Flood Insurance Program (NFIP), with
more than 4.2 million policies in force, representing nearly US $560 billion in coverage. The NFIP pays no more than US $250,000 per
loss per household and US $500,000 for small businesses.