The cost of cleaning up storm damage will balloon, forcing higher premiums on policy holders, unless the world takes urgent action to cut emissions that many scientists tie to global warming, the Association of British Insurers said on Wednesday.
In a study released ahead of the Group of Eight summit next week in Scotland, the group called on leaders of the world’s richest nations to slash carbon dioxide emissions, improve coastal defenses and strengthen buildings to dampen the impact of the predicted storms.
“Governments now have a chance to make rational choices for the future, before it is too late,” ABI’s director of general insurance, Nick Starling, told a conference as the study was released.
Damage costs from the three most expensive types of storms -- hurricanes in the United States, typhoons in Japan and windstorms in Europe -- will rise to $27 billion in an average year by 2080 up from $16 billion today if carbon dioxide emissions double their current rate, ABI’s report predicted.
“Insurance acts as a messenger for the financial costs of climate change. Insurance is all about risk and assessing risk,” added ABI policy adviser Sebastian Catovsky.
Impact on capital, financial markets
The increasing cost of storm damage will have to be found in the international money markets, pushing up the cost of borrowing as demand grows, Catovsky said. “This will have a knock-on effect both to capital markets and financial markets overall,” he said.
British Prime Minister Tony Blair, who is hosting the Group of Eight summit, hopes to push through radical plans to combat global warming, but U.S. President Bush opposes mandatory measures to cut emissions as too costly for industry.
The other members of the G8 are Canada, France, Germany, Italy, Japan and Russia.
The ABI said the final bill could be even higher as its estimates do not include population and infrastructure growth, damage to which would increase costs.
Two-thirds of the cost is covered by the insurance industry and it also needs to prepare for years when a flurry of storms combine to batter the globe.
“The important point is that that it won’t even out every year,” Catovsky said.
The insurance industry needs to build up its cash reserves to around $200 billion from $120 billion it currently holds to pay for years with severe weather, he said.
The ABI report said that sharp cuts in CO2 "could save up to 80 percent of the predicted extra costs."
'No-action' predictions
Citing climate scenarios modeled by the U.N.-sponsored experts, the ABI report predicted these outcomes if no action is taken:
- Insured damage in a severe hurricane season in the United States could rise by three-quarters to $150 billion, an increase equivalent to almost three Hurricane Andrews. The 1992 storm is the costliest single weather event on record.
- The costs of Japanese typhoons could increase by around two-thirds to $34 billion. The increase would be double the cost of typhoon damage in 2004, which was the costliest year in the last 100 years.
- The financial costs of flooding could rise across Europe, increasing the annual flood bill by up to $150 billion.
- Insurance markets could become more volatile. The capital needed by insurers to cover severe storms could rise by $78 billion, with increases of 90 percent for U.S. hurricanes and 80 percent for Japanese typhoons.
Premiums likely to rise
On Tuesday, the head of a major British insurer said that insurers are likely to raise premiums in coming years as the world’s weather becomes more violent and a major business risk.
While climate change has not led to increased insurance charges so far, it may as more extreme weather has a bigger financial impact, Andrew Torrance, chief executive of UK Allianz Cornhill Insurance Plc, told a news conference hosted by his company’s German parent, Allianz Group, and the World Wide Fund for Nature.
“We are going to need to take account of these trends," he said. "Our estimate of exposure is increasing by 2 to 4 percent per year in terms of weather-related claims.”
Allianz Group, one of the world’s largest financial conglomerates, called for G8 leaders to come up with a clearer policy on climate change so business can adapt to a global threat.
German giant eyes CO2
The insurance, banking and investment giant underlined its concerns by saying it would screen all its businesses for risks linked to rising atmospheric levels of carbon dioxide.
It said the issue of global warming would in future be dealt with at board level. “We will address the issue of climate change with other major risks that we need to manage within our company,” Joachim Faber, a board member and chief executive officer of Allianz’s investment arm, told a news conference.
Faber told Reuters separately that the company was lobbying on the issue in both Washington and Brussels, where the European Union is headquartered.
Faber said Allianz hoped business and economic forces in the United States would push the White House to adopt what he called “a more reasonable attitude.”
