Much of the media attention on climate change focuses on themeteorological effects, such as warmer temperatures, meltingicecaps and rising oceans.

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Of more importance to the insurance industry are questions thatreceive far less attention, for example:

  • How will these trends impact catastrophe reinsurance contractsand related securities?
  • Will hurricanes be more frequent, more severe or both?
  • Will insurance losses be greater?

A new report from Karen Clark & Company (KCC), titled“Climate Changeand Hurricane Loss: Perspectives for Investors,” looks at morethan 100 years of historical hurricane data to provide a basicperspective on the frequency and severity of insurance loss forinvestors. The report also examines the challenges of predictinghurricanes in the short term and offers perspective for long-terminvestors in the catastrophe market.

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KCC’s report provides context for investors as well as evidencethat climate change has had no measurable effect on the NorthAtlantic hurricanes that are most often responsible for CAT marketlosses. According to the Intergovernmental Panel on Climate Change,as cited in KCC’s report, loss levels have gone up over timeprimarily due to increases in the value of buildings now standingin the path of hurricanes.

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The report concludes that the loss potential of the CAT marketis almost the same this year as it was last year and five yearsago, the same as it will be next year and five years from now afteradjusting for increases in insured property values. This ispositive news for investors looking for investments in the nextthree to five years, with the caveat that predicting hurricaneprofiles is an inexact science at best.

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[Related: Location, location, location: Higher property valuesincrease potential catastrophiclosses]

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New-modern-project-of-building-with-crane-and-blueprints-shutterstock_110602445-Mmaxer

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(Photo: Shutterstock/Mmaxer)

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Factors for investors to consider

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Atlantic hurricanes are just one subset of what investors in theinsurance industry worry about, Karen Clark, president and CEO ofKCC says, because it’s the most important segment for the industry.“U.S. hurricane risk in the North Atlantic basin accounts for about25% of global insured CAT losses,” she explains. “Most CAT bondsand investors are heavily weighted to the Atlantic basin aswell.”

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Investors and underwriters need to understand building codes,Clark says. They vary by state and in some cases by locality,especially along the coast, and a national building code isn’tlikely to be enacted any time soon. When evaluating risk,underwriters and investors should ask:

  • For new construction are the buildings really being built tothe most current code?
  • For an existing structure, how old is the building?
  • What was the code in effect when the building wasconstructed?
  • How stringent is the enforcement of the building code?

“Age is an important variable for wind,” Clark points out. Theage of the roof—especially on residential properties—is criticalfor determining how much wind damage a building can sustain.“That’s more important than the age of the building itself,” sheadds.

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Investors and underwriters also should enquire about thecladding of the building, which includes siding, glazing and glass.In flood-prone areas or designated flood zones, looking at thebuilding’s elevation is the first step.

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Businessman-drawing-arrow-above-buildings-shutterstock_185810609-Ismagilov

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(Photo: Shutterstock/Ismagilov)

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Increased demand

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Clark sees increasing demand for CAT reinsurance and investmentover the long term. “The driving factor is increasing propertyvalues,” she says, “which cause loss potential to double every 10years.” Another key factor is that much of the loss in acatastrophe isn’t insured, for example, properties that may haveflood insurance through the National Flood Insurance Program. “It’srare to have private flood insurance,” she notes.

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There remain major perils that are not insured for, such asearthquakes and flood. Clark predicts that “Investor demand willkeep going up and the question is, ‘Can the private market come upwith creative solutions that deal with some of these additionalperils and costs?’”

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For investors to capitalize on opportunities in the CAT marketthey will need to conduct careful research and risk assessment.“Investors really have to look at what the scientists are sayingand ignore the media hype when weighing the pros and cons of theirinvestment,” Clark says. “Much of what you hear in the generalpress or media isn’t supported by scientific fact.”

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Editor’s note: The full report from Karen Clark &Company is available upon request from the company’s website byclicking here.

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Rosalie Donlon

Rosalie Donlon is the editor in chief of ALM's insurance and tax publications, including NU Property & Casualty magazine and NU PropertyCasualty360.com. You can contact her at [email protected].