Go-lleee!! The Economist Admits That Climate Change Might Cost Money!!

[hatrack]

"FOR insurers as for Floridians, the recent pounding from four back-to-back hurricanes, costing $20 billion or so, has been highly unusual, as well as unwelcome. Not since Texas in 1886 have so many hurricanes struck one American state in a single season. And Mother Nature seems to be fairly bursting with surprises. In Europe, last summer was the hottest on record and severe windstorms have been on the rise. On a ten-year view, the frequency of weather disasters has tripled since the 1960s and insured losses have risen ten-fold, according to Munich Re, the world's largest reinsurer.

Some might ascribe all this to global warming. In fact, this is far from being established—and hurricanes are especially hard to assess. Whatever the cause, the world's insurers are counting the cost of more volatile weather. “Higher variability means more uncertainty means normally a higher price,” says David Bresch of Swiss Re, Munich Re's biggest rival. However, predicting climate change and its effects in the future is harder than simply reacting to volatility today. The possibility that temperatures might rise and, for example, cause more flooding in Europe has not yet led most insurers to increase premiums and deductibles.

Since reinsurance contracts are renewed every year, adjustments can be made speedily if necessary. And insurers are constantly updating their disaster models. Swiss Re has already plotted out half a million possible storms in North America and the Caribbean alone. On the upside, climate change could make some areas less stormy. Munich Re has been studying warming patterns for more than 20 years; it expects warmer weather in Europe (more storms and flooding in winters, more heatwaves, severe storms and wildfires in summer) and some of the same in North America. Gerhard Berz, a meteorologist who heads the company's geo-risk research group, says that more study of the oceans' role in climate change would be especially helpful to scientists and insurers.

EDIT

Climate change could also increase demand for catastrophe (“cat”) bonds. These are a form of securitised risk, offered by insurers or reinsurers to limit their exposures. The investor receives a high rate of return (often above 10%) in exchange for the risk of losing his principal if losses from a hurricane, windstorm or terrorist attack exceed a certain level. (So severe must the disaster be that even the recent storms have not been strong enough to trigger payouts, though prices on the bonds have wobbled.) Such instruments are getting more popular, with hedge funds among the most eager investors: cat-bond issues totalled $1.7 billion in 2003, up 42% from 2002, according to Guy Carpenter, a reinsurance brokerage firm. Cat bonds for other big risks such as flooding could be introduced if climate change creates the need, according to Mark Hvidsten of Willis, an insurance broker."

EDIT

http://www.economist.com/finance/displayStory.cfm?story_id=3254119

[Viking12]

1. Swiss Re has been taking climate change seriously

for some time. Jeremy Legget's book, The Carbon Wars documents his interactions with the company in the 1990s.

[hatrack]

3. True, they've at the very least been paying attention

But they're one of a limited number of reinsurers who are paying attention, and reinsurance is but one small corner of the financial sector, which isn't really paying much attention at all.

[brokensymmetry]

2. I'm shocked!

Shocked, I tell you! Climate change costs money?

Of course, when extensive drought in the western U.S. causes a substantial reduction is the grain crop - perhaps leading to global famine - that might be considered a cost too.

Oh well. Now where's that ad for Hummers? :evilgrin: