Climate change futures: health, ecological and economic dimensions

THE LIMITS OF INSURABILITY
Not all risks are commercially insurable. A variety of
definitions of insurability are found in the literature that
differ in detail but share the common theme of accepting
or rejecting risks based on the nature of each risk
and the adequacy of information available about it
(Mills et al. 2001; Crichton 2002; Pearce 2002). The
perceived insurability of natural disasters and extreme
weather events may be affected by increases in the
frequency or unpredictability of these events. If the
availability of insurance is consequently reduced, development
may be constrained in the emerging markets.
In essence, private insurers set a series of conditions
that must be met before they will assume a given risk
or enter a given market. These conditions — sometimes
referred to as “Standards of Insurability” — are
intended to assure the insurers’ financial survival in
case of catastrophic losses (see Table, Appendix A).
This process involves technical and subjective judgments,
and history shows that insurers will relax the
standards when profits are high (Swiss Re 2002a).
When private insurers decline to cover a risk, the cost
shifts to others. As a case in point, the risk of residential
flood damage in the US is deemed largely uninsurable,
which has given rise to a National Flood
Insurance Program, which has more than 4.2 million
policies in force, representing nearly US $560
billion worth of coverage (Bowers 2001).
BUSINESS SCENARIOS
POTENTIAL CONSEQUENCES OF
CLIMATE CHANGE FOR THE INSURANCE
BUSINESS AND ITS CLIENTS
The following pair of business scenarios — based on
current socioeconomic trends and insurance market
dynamics — represent business impacts arising from
the technical outcomes described in the two CCF scenarios.
5 Both scenarios reflect a “business-as-usual”
stance on the part of industry, that is, minimal and
gradual interventions to alter the world’s energy diet. In
the scenarios for CCF-I, triggering events arise from the
consequences of gradual anthropogenic climate
change, while those in CCF-II correspond to non-linear
impacts. The results are neither worst- nor best-case renditions
of what the future could bring.
The scenarios are neither predictions nor doomsday scenarios.
Rather, they offer a set of plausible developments
in the insurance business environment due to climate
change and corresponding developments in insured
hazards, industry responses, and, ultimately, impacts on
the financial performance and structure of the industry.
This approach to building the scenario is similar to that
employed in an exercise commissioned by the US
Department of Defense to explore the implications of climate
instability for conflicts over resources and international
security (Schwartz and Randall 2003). The implications
for specific segments of the industry are examined
and the study concludes with an integrated scenario.
CCF-I: ESCALATING IMPACTS
In this scenario, weather-related property losses and
business interruptions continue to rise at rates observed
through the latter 20th century. The insured share
increases from a current-day baseline of approximate
25-30%, and underwriting becomes more problematic.
Corporations face more environmentally related litigation
(and associated insurance payouts), both as emitters of
greenhouse gases and from non-compliance with new
regulations (Allen and Lord 2004).
A new class of losses involving human health and mortality
emerges within the life/health branch of the insurance
industry. These are driven by thermal extremes,
reduced water quality and availability, elevated rates of
vector-borne disease, air pollution, food poisoning, and
injuries/mortalities from disasters and associated mental
health problems (Epstein 1999; Munich Re 2005).
Other health consequences become manifest in natural
systems that directly or indirectly impact humans, including
coral reef bleaching, agricultural diseases or other
events that hamper food production; animal and livestock
diseases; and forest pests. Mobilization of dust,
smoke, and CO 2
-linked aeroallergens (pollen and mold)
exacerbate already high rates of asthma and other
forms of respiratory disease.
The combined effect of increased losses, pressure on
reserves, post-disaster construction-cost inflation and rising
costs of risk capital result in a gradual increase in
the number of years in which the industry is not profitable.
A compounding impact arises from the continued
destructive industry practices of underpricing risk
and routinely allowing the core business to operate at
a loss, relying instead on profits from investments
97 | FINANCIAL IMPLICATIONS
5
This is an elaborated version of a scenario developed and published earlier in the course of the CCF project by Mills (2005).