Even small increases in the intensity of major storms couldincrease damage costs by at least two-thirds by the end of thecentury, according to the Association of British Insurers. The mostextreme storms could become even more destructive, ABI warned,making insurance markets more volatile, as the cost of capitalrequired to cover such events increases.

Few business sectors have attempted to assess the practicalimplications of climate change for their industry and theircustomers, noted John Parker, Head of General Insurance for theABI, in explaining why ABI commissioned the study. “Insurance is inthe front line of climate change,” he said. “It is insurancecompanies that will have the responsibility of dealing with many ofits consequences. And it is insurers who must be equipped toanalyze the new risks that flow from climate change, and to helpcustomers to manage these risks.”

By publicizing the results of the collaborative study, theinsurance industry is communicating the potential level of futurerisk arising from climate change, enabling governments, businesses,and individuals to make rational decisions on whether and how toavoid these costs.

The ABI study, The Financial Risks of Climate Change, based oninternational scientific research, shows that the worldwide costsof major storms are likely to increase by as much as two-thirds,pushing the average annual costs to $27 billion. Around 60 percentof the increase in total damages would be insured if insurancecoverage does not change, the study projected. These costs are notexpected to be spread evenly over time, but would occur in a seriesof extreme storms.

The report does suggest actions that governments can take toreduce these costs. For example, reducing carbon emissions couldresult in savings of up to 80 percent of the predicted extra costs,the study estimates. Governments also should continue to improvecoastal defenses and flood protection, and change building codes toensure more weather-resilient buildings.

If no action were taken, however, the insurance industry couldface a number of adverse financial challenges, the ABI warned. Bythe year 2080, the cost of insured damage in a severe hurricaneseason in the United States could rise by 75 percent, to $150billion, an increase equivalent to almost three Hurricane Andrews.The costs of Pacific hurricanes also could increase, by as much astwo-thirds, while insured losses from flooding could rise in theUnited Kingdom and Europe.

The study's authors emphasized that the loss estimates do notinclude likely increases in society's exposure to extreme storms,due to growing, wealthier populations, and increasing assets atrisk. For example, if Hurricane Andrew were to have hit Florida in2002 rather than 1992, the losses would have been double, due toincreased coastal development and rising asset values.

The uncertainty of the rising costs would render insurancemarkets more volatile. The study's authors estimate that thecapital needed by insurers to cover severe storms could rise by $78billion, with increases of 90 percent for U.S. hurricanes and 80percent for Japanese typhoons.

ABI commissioned and funded Climate Risk Management andMetroeconomica to carry out the research. The catastrophe modelingwork was undertaken in collaboration with AIR Worldwide, while RiskManagement Solutions provided data from U.S. hurricane models. Theclimate change scenarios were based on research by theIntergovernmental Panel on Climate Change.

The report called for further studies on the impact of climatechange impacts where there is limited scientific consensus atpresent.