Climate change futures: health, ecological and economic dimensions

from areas plagued by persistent drought (the African
Sahel and China’s Gobi desert) and wildfires alters air
quality in many regions of the globe.
Mold and moisture damage had already become a
crisis for insurers in some regions (particularly the US in
the late 1990s and early 2000s as evidenced by
37,000 claims in Texas alone in the year 2001
(Hartwig 2003). While this was largely due to excessive
litigation and media exaggeration, there was also
an underlying fact of increased moisture-related losses
(up more than four-fold in Texas compared to the prior
decade, representing 60% of homeowners’ claims
value) and changes in construction practices that fostered
mold growth.
The increase in infectious diseases (as examples,
malaria and West Nile virus) tax existing health infrastructure,
particularly in emerging markets. The diseases
also have adverse impacts on tourism, which, in
turn, slows economic growth and thereby the rate of
demand for insurance by the commercial sector (as
examples, hotels and factories).
The changing climate alters the prevalence, spatial
extent, and type of crop diseases and pests around the
globe. A spike in the incidence and range of soybean
rust is particularly damaging. Populations of insect herbivores
explode in some areas. This is accompanied
by a resurgence of preexisting pathogens, and in conditions
in which introduced pathogens thrive. Irrigation
requirements increase as droughts become more common.
Compounding the problem, increased CO 2
contributes
to more vigorous weed growth. Worldwide
crop losses of approximately 50% of potential yields
and stored grains are today attributable to pests. The
cumulative effect of multi-year droughts and warm, dry
winters (leaving little snowpack) results in bark beetle
outbreaks and extensive tree mortality in several
regions.
Coral reefs weaken (both physically and biologically)
as a result of wind and water movement, thermal stress
and biological processes. Significant collapse takes
place, compounded by sea level rise, increased
storminess and tidal surges, and the associated epidemics
of vector-borne diseases. Saltwater intrudes
into many aquifers, compromising water quality.
Climate change and other impacts of human activities
also accelerate the loss of wetlands and other biological
barriers to tidal surge damages.
The specific technical outcomes described above have
crosscutting impacts on various economic sectors and
lines of insurance. For example, vehicular accidents
losses increase during inclement weather and heat
waves (Munich Re 2005), as well as from floods,
windstorms and other catastrophic events. In addition
to conventional property losses, business interruptions
and associated insurance liabilities also become more
common, triggered by extreme weather events and
their impacts on energy utilities and other critical infrastructure.
Environmentally displaced persons are mobilized in
many parts of the world, putting stress on political risk
insurance systems. Insurers experience rising losses as
civil unrest and conflicts grow over food, water
resources and care for externally and internally displaced
persons (Schwartz and Randall 2003).
Contributing to the challenge, existing adaptation
methods become less effective. Examples include wildfire
suppression, flood defenses, and crop pest controls.
In some (but not all) cases, adaptive capacity
can be increased, but at considerable cost.
The compounding effects of losses are visible in many
lines of the insurance business. The emerging markets
are most hard hit, with widespread unavailability or
pricing that renders insurance unaffordable. As a
result, insurers withdraw from segments of many markets,
stranding development projects where financing
is contingent on insurance, particularly along coastlines
and shorelines vulnerable to sea level rise.
Contraction by insurers has direct and indirect dampening
effects on economic activity.
Public insurance systems step in to fill the void where
commercial insurance is no longer available. They find
it difficult to absorb the costs, but, for political reasons,
they largely consent to do so. New publicly funded
property insurance “backstops” are created for windstorm,
wildfire and several other perils. To limit their
exposure private insurers establish strict deductibles as
well as loss limits, effectively shifting a share of the loss
costs back to individuals and businesses. At the end of
the 20th century, public crop insurance systems
expanded to cover a much larger number of crops
than had historically been the case, thereby increasing
the exposure to extreme weather events. In the US, for
example, over 200 crops were covered under the federal
program as of 2005.
101 | FINANCIAL IMPLICATIONS