Climate change futures: health, ecological and economic dimensions

“Climate change is one of the world’s top long-term risk scenarios.”
- John Coomber, Former CEO, Swiss Re (Swiss Re 2004a)
“A severe natural catastrophe or series of catastrophes could generate
major insurance market disruptions.”
-US General Accountability Office (GAO 2005)
92 | FINANCIAL IMPLICATIONS
FINANCIAL IMPLICATIONS
With over 3 trillion dollars in annual revenues 1 ; insurance
is the world’s largest industry. 2 It represents 8% of
global GDP, and would be the third largest country if
revenues were compared with national GDPs.
Insurance provides a mechanism for spreading risk
across time, over large geographical areas, and
among industries. The core business of insurance traditionally
involves technical strategies for loss reduction
as well as financial strategies for risk management and
risk spreading. The growing repository of insurance
loss data augments the geophysical observing systems
with trends in financial losses.
The core business of insurance, as well as the sector’s
activities in financial services and asset management,
are vulnerable to climate change (see figure 3.1). As
such, insurers are impacted by and stand to be prime
movers in responding to climate change (Vellinga et
al. 2001; Mills 2004). “Insurance is on the front line
of climate change … and it is insurers who must be
equipped to analyze the new risks that flow from climate
change, and to help customers to manage these
risks” (ABI 2004). Nonetheless, it must also be kept in
mind that insurance is one element of a much broader
patchwork for spreading risks (see figure 3.2); and
insurers may not have as long a time horizon as do
reinsurers.
Owing to the types of hazards that tend to be insured,
the largest proportion of total catastrophe losses sustained
by insurers is weather-related.
The availability and affordability of insurance is essential
to economic development, financial cohesion in
society and security and peace of mind in a world
where hazards abound and are increasingly unpredictable.
Unanticipated changes in the nature, scale,
or location of hazards — human-induced or natural —
are among the most important threats to the insurance
system. This has been seen repeatedly in the past in
the aftermath of previously unimagined earthquakes,
windstorms and terrorist events. Observers from Florida
note that “[Hurricane] Andrew exposed old methods,
such as trending historical hurricane loss totals, as illsuited
for managing and pricing hurricane exposure”
(Musulin and Rollins 2005). Despite this record, there
is, oddly, continued skepticism when the specter of
new and unprecedented types and patterns of events
emerge. An eye-opening industry report from the mid
1980s (AIRAC 1986) highlighted the importance of
considering multiple catastrophes in a single year,
while observers nearly 20 years later lament the catastrophic
results of the industry’s failure to adopt this perspective
in advance of the four-hurricane season in
2004 (Musulin and Rollins 2005; Virkud 2005,
Harrington et al. 2005).
Most discussions and climate impact scenarios are
cast from the vantage point of the natural sciences,
with little if any examination of the economic implications.
Moreover, the technical literature often takes a
“stovepipe” approach, examining specific types of
events in isolation from the real-world mosaic of often
interrelated vulnerabilities, events and impacts. For
example, analyzing the effects of drought on agriculture
may be done in isolation, effectively suppressing
1
Detailed country-by-country statistics (in US dollars and local currencies) are published in Swiss Re’s annual sigma “World Insurance” reports
(for example, Swiss Re 2004b). Data presented in this report represent Western-style insurance and do not include the premium equivalents
that are collected from alternative systems, such as Takaful methods used in the Muslim world or so-called “self-insurance,” which is often
formalized and represents considerable capacity.
2
Defined in terms of revenues for specific commodities or services, as opposed to more all-encompassing meta-industries such as “retail” or
“technology.” The world oil market, for example, is US $970 billion/year at current production levels of 76Mbpd and US $35/bbl price
[Surpassing US $60 in summer 2005]; world electricity market in 2001 was US $1 trillion at 14.8 trillion kWh generation assuming US
$0.07/kWh unit price; tourism receipts were US $445 billion (2002); agriculture US $1.2 trillion (2002); world military expenditures were
US $770 billion (2002). Source: 2005 Statistical Abstract of the United States.