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

Few business sectors have attempted to assess the practical implications of climate change for their industry and their customers, noted John Parker, Head of General Insurance for the ABI, in explaining why ABI commissioned the study. “Insurance is in the front line of climate change,” he said. “It is insurance companies that will have the responsibility of dealing with many of its consequences. And it is insurers who must be equipped to analyze the new risks that flow from climate change, and to help customers to manage these risks.”

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

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

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

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

The study's authors emphasized that the loss estimates do not include likely increases in society's exposure to extreme storms, due to growing, wealthier populations, and increasing assets at risk. For example, if Hurricane Andrew were to have hit Florida in 2002 rather than 1992, the losses would have been double, due to increased coastal development and rising asset values.

The uncertainty of the rising costs would render insurance markets more volatile. The study's authors estimate that 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.

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

The report called for further studies on the impact of climate change impacts where there is limited scientific consensus at present.

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