Climate change futures: health, ecological and economic dimensions

94 | FINANCIAL IMPLICATIONS
• Increased geographical simultaneity of events (for
example, a broad die-off of coral may be followed
by an uptick in tidal-surge damages in multiple
regions/coastlines):
o Insurers spread risks (geographically) to reduce
aggregate losses.
• Such temporal and geographic “clustering” of
impacts has led to the concept of “sideways exposure”
in the insurance lexicon.
• Increased difficulty in anticipating "hot spots" (geographic
and demographic) for a particular hazard. 3
• A trend toward hybrid events involving multiple
sources of insurance losses is of particular concern
(Francis and Hengeveld 1998; White and Etkin 1997):
o This is exemplified in the case of ENSO (El
Niño/Southern Oscillation) events projected to
change nature under climate change — which
can involve various kinds of losses from rain, ice
storms, floods, mudslides and wildfire.
o Sea level rise is multi-faceted risk, with impacts
on flood, property, health and crop insurance
(via soil erosion and seawater intrusion into the
fresh groundwater called “lenses” underlying tropical
isles).
• Novel events, such as the 1999 Lothar windstorm
so damaging to France’s forests and the first-ever
recorded hurricane in the Southern Atlantic affecting
Brazil in 2004:
o Catastrophe models to date inadequately
include many emerging non-linear trends, as well
as the multiple “small” serial events associated with
a changing climate (Hays 2005).
MARKET-BASED RISKS
• The inadequate projection of changing customer
needs arising from climate change:
o This includes property insurance to cover climate
adaptation technologies and new liabilities
faced by non-compliant and polluting industries.
o The consequences can include flight from insurance
into other risk-management products and
practices.
• The changing patterns of claims. For example, a rise
in roadway accidents due to increasingly icy, wet
and foggy conditions and associated difficulty in
adjusting pricing and reserve practices to maintain
profitability.
• Regulatory measures instituted to cope with climate
change, which will include measures and practices
outside the insurance industry:
o Emissions-trading regulations and liabilities, or building
codes and factors inside the industry — such as
changing expectations of insurance regulators. In
the wake of the four deductibles charged to
some Florida homeowners in the fall of 2004,
regulators there mandated reimbursement to
36,000 homeowners, forbade insurers from
canceling or non-renewing victims and required
“single-season” deductibles for windstorm hazards
(Brady 2005).
• “Reputational” risk falling on insurers (and their business
partners) who do not, in the eyes of consumers,
do enough to prevent losses arising from climate
change. A recent survey of companies in the UK
found that loss of reputation was the greatest risk
they face (Coccia 2005).
• Parallel stresses unrelated to weather or climate, but
compounding with climate change impacts to amplify
the net adverse impact on insurers:
o These include drawdowns of reserves due to
non-weather-related events, such as earthquakes
or terrorist attacks, erosion of customer confidence
due to financial unaccountability and
scandals, and increased competition from selfinsurance
and other mechanisms that draw premium
dollars out of the insurance sector.
As of today, fewer than one in a hundred insurance
companies, and few of their trade associations and
regulators, have adequately analyzed the prospective
business implications of climate change, heightening
the likelihood of adverse outcomes. This is especially
so for US insurers, whose European counterparts have
studied the issue for three decades (Mills et al 2001).
Ultimately, outcomes will depend on the nature of the
hazards, broader economic development, regulatory
responses, and consumer reactions to changes in public
and private risk management systems.
3
For example, in 2005 the city of Seattle, WA, issued its first-ever heat warning as the city was added to the US National Weather Service’s
excessive heat program, a reflection of the determination that there was an increased possibility of morbidity or mortality from extreme heat
events (Associated Press 2005).