A Warning On Insurer Global Warming Problem

WASHINGTON–Washington State Insurance Commissioner Mike Kreidler warned a House panel yesterday that coping with global warming will be a real challenge for consumers and the insurance industry.

Also sounding an alarm was Frank Nutter, president of the Reinsurance Association of America, who said the insurance industry is at “great risk” if it does not understand global climate variability and the frequency of extreme events.

Both Mr. Nutter and Mr. Kreidler made their comments in testimony before the House Select Committee on Energy Independence and Global Warming.

Rep. Edward Markey, D-Mass., convened the hearing to address the unnecessary risks and costs to America's economy if the nation doesn't set limits and reduce heat-trapping global warming pollution.

“This could spell economic doom for the insurance industry, which comprises approximately 10 percent of the United States economy,” Mr. Markey said in his opening statement.

The hearing also reviewed the results of a new Government Accountability Office study that found total losses from weather-related events over the past 25 years have topped half a trillion dollars, and warned of significant additional costs from a hotter world with a more unstable climate.

In his testimony, Mr. Kreidler said global warming and the resultant climate change will challenge insurers and consumers on many levels.

“Climate change appears to be impacting weather patterns which, in turn, affect insured property losses,” Mr. Kreidler said, noting some insurance companies have stopped writing or restricted the writing of insurance in the Gulf and Atlantic coasts because of the high risk posed to properties from increased hurricane activity.

“This is causing availability and affordability problems in some areas as consumers have fewer options,” he testified.

Some insurance companies are seeking to use new risk models based on increasing projections of future hurricanes instead of past historical hurricane information, Mr. Kreidler said, noting that, because these models are predicting more hurricane activity, this “will likely drive the cost of property insurance in those states even higher.”

“If property insurance is not available, or becomes 'practically' unavailable because the cost is so high that consumers cannot afford it, it will affect the economic development in areas at risk from hurricanes and potentially the national economy as a whole,” Mr. Kreidler said.

In his testimony, Mr. Nutter cited what he termed a “sobering” GAO study that reported private and federal insurers paid $320 billion in claims on weather-related losses from 1980-2005, with private insurers paying $243 billion, or 76 percent, of the total.

Mr. Nutter testified that property and casualty insurers “must be more than a pass-through mechanism for the costs associated with natural disasters.”

Understanding global climate change and integrating that information into the insurance system is an essential part of addressing climate extremes and conveying information to governments and the public about the economic consequence of human activity in the face of changing global climate, he said.

“It is the risk of natural events which drives the demand for insurance coverage,” he said, “and yet, if not properly managed, it can threaten the viability of an insurer if it is overexposed in high-risk areas. An insurance company thrives or dies on its ability to make estimates of the economic consequences of future events.”

Mr. Nutter also pointed out that insurers are in the business of assessing risk, pricing it and providing risk financing or transfer.

“Its long-term strategy, however, does not include bearing the cost of climate change without a concomitant commitment on the part of society to pursue a mitigation strategy–addressing the causes and consequences of climate change,” he said.