The terrorist attacks of 9/11 opened insurers' eyes to a catastrophic risk that they had been assuming for free. Their reaction provided a foretaste of how the global market might react to abrupt climate change. Following 9/11, insurers stopped writing policies that automatically included coverage of terrorist attacks. A number of major construction projects had to halt, because banks would not finance them without terrorism coverage. Ultimately Congress passed and President Bush signed a law shifting responsibility for $100 billion in damage from future terrorist attacks to the U.S. government, and the construction projects got rolling again.
As climate change starts inflicting losses, insurers will again pull back, shifting financial risk to businesses and homeowners, the banks that finance them--and finally to taxpayers. In Florida, huge increases (up to 40%) in insurance rates are already making it harder for people to sell homes, according to the South Florida Sun Sentinel.
More than 1,000 miles from New Orleans, in Cape Cod, Mass., a far-flung echo of Katrina has been the 20% rise in reinsurance costs (reinsurers are financial institutions that backstop insurance companies). The increase prompted Hingham Mutual Group, a property and casualty insurer, to drop coverage for 6,500 commercial properties. Customers left in the lurch have a fallback in FAIR (short for Fair Access to Insurance Requirements), a program mandated by various states and run by insurers. But Massachusetts's FAIR plan recently requested big rate increases, arguing that past weather patterns may no longer be a guide to estimating future climate risks. That rationale was "unprecedented," a team of industry experts noted in a report entitled "Availability and Affordability of Insurance Under Climate Change"; it's a vivid example of how insurance has difficulty adapting to changing climate.
For insurers, the hazards of climate change become more concrete each year. Andrew Dlugolecki, a risk analyst at the Tyndall Center for Climate Change Research in Britain, recently estimated that if climate gradually warms, the chances of the industry getting wiped out by weather-related catastrophes will rise from about 1 in 100 worldwide today to 9 in 100 by 2050. A 9-fold increase in the risk of collapse places a heavy burden on insurers, but the risks may be far greater than that. Asked in 2003 how climate change that's abrupt and chaotic might affect those odds, Dlugolecki speculated that the risk of catastrophic weather-related losses rises to about 9 chances in 100 by as early as 2010. To insure a property or business affected by that degree of risk, a carrier would have to charge annual rates as high as 12% of insured value--most businesses and individuals start self-insuring (industry-speak for dropping their coverage and taking their chances) when premiums reach 3% of value.
Already the pain of weather-related insurance risks is being felt by owners of highly vulnerable properties such as offshore oil platforms, for which some rates have risen 400% in one year. That may be an omen for many businesses. 3 years ago John Dutton, dean emeritus of Penn State's College of Earth and Mineral Sciences, estimated that $2.7 trillion of the $10-trillion-a-year U.S. economy is susceptible to weather-related loss of revenue, implying that an enormous number of companies have off-balance-sheet risks related to weather--even without the cataclysms a flickering climate might bring.
Corporate leaders could soon feel the heat too. In 2004, Swiss Reinsurance, a $29 billion financial giant, sent a questionnaire to companies that had purchased its directors-and-officers coverage, inquiring about their corporate strategies for dealing with climate change regulations. D&O insurance, as it is called, insulates executives and board members from the costs of lawsuits resulting from their companies' actions; Swiss Re is a major player in D&O reinsurance.
What Swiss Re is after, says Christopher Walker, who heads its Greenhouse Gas Risk Solutions unit, is reassurance that customers will not make themselves vulnerable to global-warming-related lawsuits. He cites as an example Exxon Mobil: The oil giant, which accounts for roughly 1% of global carbon emissions, has lobbied aggressively against efforts to reduce greenhouse gases. If Swiss Re judges that a company is exposing itself to lawsuits, says Walker, "we might then go to them and say, 'Since you don't think climate change is a problem, and you're betting your stockholders' assets on that, we're sure you won't mind if we exclude climate-related lawsuits and penalties from your D&O insurance.'" Swiss Re's customers may be put to the test soon in California, where Governor Arnold Schwarzenegger is pushing to restrict carbon emissions, says Walker. A customer that ignores the likelihood of such laws and, for instance, builds a coal-fired power plant that soon proves a terrible bet, could face shareholder suits that Swiss Re might not want to insure against.