HURRICANES
the USA. We are still not having that debate, but I present here three tables (Fig.1) from the Aon insurance company’s 2019 Annual Report “Weather, Climate and Catastrophe Insight” that show that the costs continue to climb, and that seven of the eight top loss-makers are weather-related, with flooding and hurricanes damages increasing far faster than all other catastrophe types. Therefore it is interesting to look back to 2007 (vertical red line on Fig.1) and realize how much was already then understood. If anything, costs of natural disasters have risen more steeply on average since 2007 than they had before.
My notes from the meeting are as follows:
Lord Peter Levene, Chief Executive Officer, Lloyd’s of London on “Insurance Industry Catastrophe Trends and Climate Change” noted several recent reports that have drawn attention to climate change challenges. Nicolas Stern, in the British Treasury’s Stern Review of Global Warming says “according to the worst-case scenario, the global economy may shrink by 20 % and generate 200 million refugees.” To an attentive 125 attendees, Lord Levene made the following remarks and responded to questions. “We live today in chang- ing times – droughts, famines, terrorism. No lack of crises. If we fail to act now, we put the world at risk for great damage from climate change. Lloyd’s works to understand risk trends, and underwrites $12 billion insurance in the U.S., the world’s largest insurance market, increasing at $2 billion per year. Three key issues: 1) Is the U.S. in denial, facing up to $100 billion, twice that of Hurricane Katrina, in insurance indus- try payouts related to natural disasters? 2) Is the insurance industry strong enough to protect the insured from Mother Nature? 3) What action can we take on global climate change? Because there are sound reasons to take action.
1. Though the 2006-huricane season was the third mild- est in over 60 years, weather-related catastrophes are causing the insurance industry’s highest losses ever – 2005 was the worst year, with over $85 billion in claims, 80 % from U.S. hurricanes. The North Atlantic Ocean entered a new cycle in the 1990s, these cycles typically last 30 years; expect severe hurricanes over the next 10+ years. The ten warmest years on record have been since 1995. No one in the insurance industry now denies global climate change. Now, increasingly accurate short-term weather predictions see longer storm seasons that cover larger areas than ever. The U.S. coast has $7 trillion in assets, especially in New York and Florida. Two years after Katrina and 2 years before the next U.S. presidential election, where is the debate in the U.S. on climate change? Lloyd’s believes that a $100 billion natural catastrophe can now happen anywhere on the U.S. Atlantic coast. Lloyd’s believes there needs to be open discussion now and extreme action on land use: building codes must be improved and other mitigations must occur. If Florida were to meet better building and location standards, natural disaster damages would be reduced to half of what they were in 1992. Society’s stakes have never been higher. The tragedy would be the occurrence of a loss ten- times larger than that due to Katrina. Lloyd’s is forming a high-level task force to lead the debate.
30 TPG •
Jul.Aug.Sep 2020
2. U.S. insurance mechanisms are strong but can only continue if free markets continue. Yet, there are calls for windfall taxes. The U.S. insurance industry employs 1.2 million people (one in 50), contributes 15 % to the national domestic product, and in 2005, paid out $1.3 billion per day in claims. It settled 95 % of all claims within a year of Katrina. Claims are expected to be lower in 2006 because of the third calmest hurricane season in six decades, which balances out the highest claims of 2005. For the Fortune 500 companies, the average return on investment is about 14 %; the insur- ance industry trails this with peak performance one in ten years. The peak represents restorative period to balance years of insurance industry losses. The 9/11 event had $7 billion in claims. In the last 30 years, the U.S. insurance industry lost $400 billion. Catastrophe losses are rising rapidly. To cover all claims, there must be sufficient funds. Insurance operates most efficiently when left to free-market forces. The global insurance industry is well equipped to insure the U.S., and to model risk and spread risk from natural disasters. Terrorist risk is best managed by private/public part- nerships, but natural disaster insurance pricing should be free market and risk based. The insurance market is highly internationalized. Lloyd’s paid $6 billion from Katrina. About 80 % of U.S. insurance is covered by foreign reinsurance. Lloyd’s is concerned that U.S. insurance will be left behind because of state constraints which work counter to markets, have discriminating rules, and require 100 % of equity as collateral. If $8 billion is locked up in collateral cash for international insurance, it is not doing any good. This large equity requirement is not imposed on U.S. firms, but only on foreign firms. The entire insurance industry should be free market, risk based, fair, and transparent.
3. In July 2006, 200 business leaders attended a London conference and agreed that we can only make progress if there is commitment from every major country. Many U.S. States and local governments are working to cut greenhouse gases per Kyoto Accords. In the U.S., only 80 % of leaders are committed; 90% say companies that take climate change seriously have a competitive business advantage. DuPont slashed CO2 gas releases while increasing production. Kraft ice cream plants did the same. For financial strength, reputation… these trends will continue. 92% of conference attendees agreed that more energy efficiency - turning green – is good business. Lloyd’s insures one fourth of the world’s wind farms to provide clean, renewable energy with no impact on climate change.
We must agree to deal with climate change if we want to leave a healthy planet to future generations. We need to rethink global public policies based on facts and risks, and coordinate market-based action on climate change. The insurance industry can play a good role in climate-change risk management. Even if we stop generating greenhouse gases now, we will see the effects in 30 years. Some of the biggest players – China, India, and the U.S. – have not signed on to the Kyoto Accords.
www.aipg.org
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64
