An Ill Wind Blows No Good But The Stats Point As Much To Fatter Premiums As Climate Change

The Age

Saturday October 1, 2005

Rod Myer

Insurers say they are in the eye of the storm like never before but perhaps the world's populated areas are having a run of bad luck, writes Rod Myer.

DRAMATIC scenes on our television screens showing the destruction and desperation wrought by hurricanes Katrina and Rita have heightened worry about human-induced climate change. Fears that were once the preserve of environmentalists have spilled through the wider community, government and the business world as we struggle to come to terms with what such disasters mean.

Coping with their aftermath means dealing with trauma and loss, rebuilding lives, infrastructure and industry, and learning from past mistakes. It also means shelling out a lot of cold, hard cash by individuals, governments and the insurance industry.

Nikolaus von Bomhard, chairman of international insurance giant Munich Re, says Katrina and Rita will clobber the insurance market with losses of $US40 billion ($A52.6 billion). $US30 billion is attributable to Katrina alone. Munich Re, one of the four giants that dominate the global reinsurance business, will carry the can for EUR1.33 billion ($A2.1 billion) of that.

Facts like those make the insurance sector the commercial interface with the climate change debate. If a bushfire burns your home it is a disaster, but the insurance company carries the bigger picture in its balance sheet of how widespread and common such events are.

The reinsurers are most atuned of all. They take the riskiest business off general insurers to spread it through the international markets, much like a high-flying rails bookmaker might accept lay-off bets from smaller competitors too exposed to one horse. Of the $2 billion damage caused by the 1999 hailstorm in Sydney, only $300 million was carried by local insurers.

Global warming for the reinsurers is a reality, not a debating point. Von Bomhard says "losses on the scale of Katrina could happen on any continent".

Its aftermath "clearly brought home the huge loss potential of extreme weather-related events. Insurers and reinsurers have to take these trends into account, otherwise the private sector will reach the point where it is no longer able to assume such risks."

What really concerns von Bomhard and others in the industry is what they see as this trend to increased numbers of devastating natural catastrophes that seem to indicate climate change is well under way.

The statistics are stark. In the 1950s there was an average of 20 of what Munich Re classifies as "natural catastrophes" a year. By the '90s this had jumped to 91, and in the past 10 years the average has been 63. The average annual figure for insurance losses has skyrocketed from $US6.5 billion (in 2004 dollars) in the 1960s to $US132 billion in the '90s. In the decade from 1995 to 2005 losses were $US102 billion.

The accompanying graph shows that the number of catastrophes rose slowly from the '50s but in the mid-'80s skyrocketed, creating fears that climate change is already making itself felt.

George Walker, senior analyst with multinational Aon Re, has spent a lifetime studying climate and natural disasters as an academic, analyst and adviser to the Commonwealth on Cyclone Tracy, which demolished Darwin in late 1974.

He says global warming is demonstrably occurring, but cautions against blaming it for the seeming rise in cyclonic activity and drought. "Climate is always changing and weather patterns are cyclical," he says.

Southern Australia has been in or close to drought for seven years but this is not necessarily due to global warming. "The '20s and '30s were very dry too but no one remembers that now," Walker says.

Cyclones, says Walker, are also cyclical. "In Australia the rate of losses from cyclones has gone down since the '70s." The hurricanes and typhoons that have devastated the US, the Caribbean and Japan in recent times are more about the trajectory of the storms than their numbers.

"There's no evidence that it's due to greenhouse," Walker says. "It's a repeat of things that have happened in the past." Just as the cycle will shift in the Gulf of Mexico reducing losses, in Australia "losses are due to increase", he says.

That brings into question the natural disaster figures produced by Munich Re and others. They are not simply objective counts of the numbers of vicious storms. To be listed, events must cause great human harm as well as economic and insurance loss.

So a cyclone ripping through the Kimberleys would not be counted if the damage toll was only on trees, and perhaps a station homestead. But a smaller storm lashing a community in Florida would be.

Demographics also come into it. A cyclone in Florida in the 1920s might have flooded a few farms. The same event now would cause havoc among the new, wealthy communities that have sprung up along the foreshore, destroying lives and infrastructure and causing big losses for the insurers.

The Boxing Day tsunamis are said to have caused total economic damage of $US13 billion. Katrina's $US30 billion cost quoted by von Bomhard is just the private insurance cost of wind damage. The US Government carries the flood insurance and local authorities and utilities the costs of infrastructure. So the total bill for Katrina, which killed 800 people, will be far higher because Americans are richer than Indonesians.

There's also an economic incentive for the insurers. "It's good for them to say global warming is increasing the number of disasters because then they can charge more," observed one broking analyst.

The insurance sector is getting more skilled at risk management, which will help it cope in a warmer world, Walker says. Computer projections enable risk to be priced more accurately, and the post-September 11 practice of ensuring underwriting as well as investment activities turn a profit means reserves are stronger.

But the industry, like the climate, has its cyclical element and all risks cannot be covered by reserves. "Katrina alone will take 20 per cent of all the capital out of the reinsurance market," said the broking analyst, and reserves will take time to build up again.

The greatest danger of global warming to insurers may be as an insidious risk such as asbestos, says Walker. As its effects are not immediately apparent, there could be a wave of law suits in 30 years, with people saying governments and others should have known the dangers it presented and acted earlier, he says.

"You have to superimpose the greenhouse effect on the constant change in climate," Walker says. There's strong evidence that it is causing increased temperatures, but it's harder to say with certainty what effect it will have, he says.

© 2005 The Age

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