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Between 1970 and 1992, insurance companies took more than $10
billion in premiums for property insurance in Florida. On 24 August 1992,
within the few hours Hurricane Andrew took to pass over the state, they lost
all that, and another $6.5 billion besides. In June the 1993
hurricane season began, and until it ends in November insurance companies
around the world will be praying that the big hurricanes of recent years
will not recur.

In the past six years the insurance industry has been hit by a succession
of huge claims following devastating tropical hurricanes. In 1988,
Hurricane Gilbert devastated Jamaica. The following year Hurricane Hugo
caused havoc in the West Indies. In 1992 came Hurricane Andrew, followed a
month later by Cyclone Iniki, the most powerful storm to hit Hawaii this
century. Since 1987 insurance companies have had to pay out more than
$50 billion in meeting claims following a string of severe storms and
other disasters. Concerned that the greenhouse effect could make their
problems even worse, and perhaps spell disaster for the insurance companies
themselves, many insurers are using recent climate research to help in
assessing the risks of storm damage.

Reinsurance, the ‘insurance of insurance’, makes insurance a global
business. For risks such as hurricanes, where claims can be huge, direct
insurers (the high street insurance companies that consumers are familiar
with) spread the risk by reinsuring with another company or syndicate of
individuals, known as ‘Names’, to meet claims above a certain amount. In
this way, a loss in Florida can be felt as strongly in London or Zurich as
it is in Miami.

In the wake of Hurricane Andrew, many insurers have hedged their bets. In
the US, 36 companies have cancelled or limited property insurance in coastal
areas of Florida. Tens of thousands of home owners and many businesses have
been left without cover, or forced to rely on state and federal insurance
pools. Where insurance cover remains, premiums have risen by up to 40 per
cent.

‘Florida is now facing the kind of problems we have had over the last 18
months,’ says William Tomlin, general manager of one of the Caribbean’s
biggest insurance brokers, General and Marine. He says that finding enough
reinsurance for his clients’ insurances had become ‘a nightmare . . . If
anyone had told the reinsurers 10 years ago that they could face $20
billion in insured catastrophic losses in one year, they would have been
laughed at.’

Tomlin painted a grim picture of the Caribbean’s growing insurance problems
in May at the US National Hurricane Conference in Orlando, Florida. To
insure a property in 1993, the policyholder must pay an annual premium of 2
per cent of the value of the property. On top of that, if the property is
hit by a hurricane the policyholder must pay not the first 2 per cent of the
claim, but 2 per cent of the sum insured. Put these requirements together,
and the result is punitive. Insuring a resort hotel valued at $10
million, for example, would involve paying $200 000 each year in
premiums. In the the event of a hurricane, the owner would have to foot the
bill for the first $200 000 of damage.

The impact on island economies heavily dependent on tourism is appalling,
says Tomlin. The biggest threat is to foreign exchange because, on average,
70 per cent of each premium goes out of the country. But many existing
policyholders are cancelling or reducing coverage because they cannot afford
the premiums, in turn creating problems for the banks and financial
institutions who have lent money on their properties. The next hurricane
could damage or destroy a building and its associated business, leaving the
uninsured or underinsured mortgagee with no means of repaying the loan.
Even when a building is fully insured, very high premiums are putting some
mortgagees into debt, while a hurricane could bankrupt others because they
would have to find 2 per cent of the value of the property.

In the US, Florida is not the only state affected by companies pulling out
of property insurance as they find it difficult to obtain enough
reinsurance. Already property owners in Hawaii, Louisiana, Texas, New Jersey
and New York are finding that some companies are limiting coverage because
of their bad record on claims for weather damage. This will hit the building
and tourist industries hard, just as the US seems to be coming out of
recession.

While some companies are reacting to the recent spate of catastrophes by
withdrawing from insuring buildings, others are scrutinising the global
warming forecasts issued last year by the UN’s Intergovernmental Panel on
Climate Change. They want to know whether the recent spate of catastrophes
is due to freak incidents, or whether it marks the beginning of a long-term
change in climate due to an enhanced greenhouse effect.

Best guess

In 1992, the meteorologists and climatologists who make up the scientific
panel of the IPCC, and who represent more than 40 governments, concluded
that global warming is inevitable if greenhouse gas emissions are not cut,
and that in the next century the ‘best guess’ is that warming will reach the
dangerous rate of 0.3 °C per decade. The 1980s were 0.2 °C
warmer than any other decade since records began 140 years ago. The 1990s
opened with the hottest year ever; followed by the third hottest – despite
the significant cooling effect produced by the eruption of Mount Pinatubo
in June 1991.

A growing number of scientists are now going on the record as saying that
the signs of global warming are already appearing or becoming apparent, but
the critical question for the insurance industry is whether this will
increase storminess around the world. On this, scientific opinion is split.

Hurricanes form only above seas with surface temperatures above 27 °C
and, in the kind of world the IPCC envisages for next century, there will
certainly be greater expanses of sea at a temperature suitable for spawning
hurricanes . On the other hand, all global warming models predict
greater warming at higher latitudes than at lower ones, which could mean the
hurricanes are less destructive. This is because the velocity at which wind
flows from one pressure system to another is determined by temperature
difference – the greater the contrast, the greater the increase in wind
speed. If there is less difference in temperature between higher and lower
latitudes then, all other things being equal, windstorms should be less
intense.

No matter how the dice fall on hurricanes, however, there will be many more
potential catastrophes to worry about in a world where average temperatures
are spiralling upwards. Sea levels would rise, which would certainly lead
to more severe storm surges, throwing up the spectre of worse versions of
the ruinous floods that submerged thousands of hectares in eastern England
and the Netherlands in 1953. Those floods killed more than two thousand
people, damaged tens of thousands of homes and destroyed countless farms and
businesses.

Global warming would inevitably cause more droughts, leading to blazes like
the bushfire which consumed the Oakland hills in California in 1991 and cost
the insurance companies $1.7 billion in claims. Firefighters called
that fire, which spread through suburbs where houses were spaced invitingly
among dry brush, the ‘fire of the future’. A warmer atmosphere would also
lead to more precipitation in other parts of the world and to more
rain-related flooding.

The biggest insurance companies, though, are employing their own
climatologists and meteorologists, and setting up special ‘greenhouse teams’
in an effort to limit their crippling losses from weather damage. A
meteorologist, Gerhard Berz, heads the technical research division of Munich
Re, the world’s biggest reinsurance company. He is in no doubt that the
present problems of the insurance industry will be dramatically aggravated
if the predictions about global warming come true. ‘The increased intensity
of all convective processes in the atmosphere will force up the frequency
and severity of tropical cyclones, tornadoes, hailstorms, floods and storm
surges in many parts of the world, with serious consequences for all types
of property insurance,’ he says

Insurers’ nightmare

How serious could this become? In densely populated and wealthy areas where
buildings are heavily insured, Berz concludes, the loss potential of
individual catastrophes can reach a level where the national and
international insurance industries do not have the capacity, or reserves,
to foot the bill. One insurers’ nightmare is a supercyclone (one with
sustained wind speeds in excess of 240 kilometres an hour) smashing into
Manhattan or Tokyo. This could generate claims approaching, or even
exceeding, the total funds available for reinsurers, which currently stand
at about $160 billion.

If a single catastrophe can exceed the capacity of the reinsurance market,
how bad might it become if the recent spate of catastrophes continues, or
even grows? Senior executives in insurance companies in both London and
Zurich believe that a complete collapse of the reinsurance industry is
possible. If that happens, the direct insurance market also implodes, since
the direct insurers would find themselves unable to spread their risks on
the reinsurance market. And one of the world’s biggest businesses – at
$1.3 trillion a year its turnover is more than either the arms trade
or the oil industry – would have shrunk to a shadow of its former self.

Interestingly, economists rarely include economic ‘surprises’ such as the
collapse of the international reinsurance market into their calculations of
the economic cost of unmitigated global warming. Yet there would seem to be
little chance of operating healthy economies without a healthy international
insurance industry.

As Munich Re puts it, in a 1990 report on windstorms: ‘For the first time in
the history of our planet, mankind is about to change the climate
significantly and possibly irreversibly, without having any idea of the
consequences that will have.’

Swiss Re, another major company, thinks similarly. In the wake of Europe’s
disastrous windstorms in the winter of 1990, it issued an article called
‘Storm damage: quo vadis?’ which said that: ‘There is a significant body of
scientific evidence indicating that last year’s record insured losses from
natural catastrophes was . . . the result of climatic changes that will
enormously expand the liability of the property-casualty industry. In the
light of the magnitude of these losses, it would be prudent to act as if
(global warming) is correct. Failure to act would leave the industry and its
policyholders vulnerable to truly disastrous consequences.’

Stormier future

In Britain the Reinsurance Offices Association issued a report which agrees:
‘Even a cursory glance at some of the basic principles of reinsurance
reveals the concern that ought to exist about the greenhouse effect scenario
. . .’

The industry has recently seen the first example of insurers limiting their
losses by listening to what scientists are saying. One Lloyd’s syndicate
called in a top British climatologist after Hurricane Hugo in 1989. The
syndicate was told that, on the balance of probabilities, the southern
states of America were heading for a stormier future.

‘Somebody had got off the fence,’ said an underwriter from the syndicate.
‘They said, ‘If you’re asking us, yes, we think there’s a direct link, and
this could have an effect on your business.’ We started to incorporate the
statement that we had received and the areas we had been warned about, into
our whole rating base, which we are glad to say resulted in us reducing
our commitments in areas like Florida.’ Such prescience has been noted with
envy by other Lloyd’s syndicates for whom Andrew was one further beating.

While it may be difficult to find leading climatologists who will give
clear-cut answers as to whether the greenhouse effect will increase the
incidence of hurricanes, the work of Berz and his technical research
division has given Munich Re some important clues for setting rates for
weather insurance. Its report on windstorms concluded that such storms ‘will
increase not only in frequency and intensity but also in duration and the
size of areas at risk. Risk conditions are not only growing worse in the
population centres and industrial regions along the northeast coasts of the
US, Australia and New Zealand or in the whole of Japan already exposed to
such hazards in the past, but possibly also along the coasts of Western
Europe.’ Swiss Re has gone one step further than Munich Re, and has set up a
specialist Greenhouse Effect Project Team – the first company to do so. The
team has already warned the company of the consequences of high exposure to
insuring catastrophic losses in cities such as New York or Tokyo.

As analyses like that of Munich Re and Swiss Re permeate the worried
markets, attention is bound to turn to the scope for mitigation of the
enhanced greenhouse effect. In May, Munich Re itself made a public appeal
for governments and industry to take action to avert the threat of climate
change. But the insurance industry itself can have a powerful influence.

In a recent Greenpeace report, Climate Change and the Insurance Industry, I
pointed out that the insurance industry can lobby governments directly for a
reduction in the emission of greenhouse gases, in the same way that the oil
and coal industries lobby aggressively against such limitations .
The industry can also preferentially invest capital in industries which are
looking at ways of cutting their energy demand or using renewable fuels. And
it can help to encourage the transition away from economies dependent on
oil and coal, which is ultimately the only answer to the threat of ruinous
climate change. By promoting the solar industry, for example, the insurance
industry can foster the security of its own future.

To date, the irony of the potential link between fossil-fuel related
greenhouse gas emissions and some of the biggest losses incurred during
Hurricane Andrew has occurred to surprisingly few in the insurance industry,
and seemingly nobody in the oil industry. As Andrew passed over the Gulf of
Mexico, it toppled 43 oil rigs and left 125 leaning, damaged 393 pipelines,
and set 5 rigs adrift. The total bill for the industry and its insurers
came to $200 million.

In One Lime Street, Lloyd’s in-house magazine, the financial journalist
Peter Corbyn agrees that ‘Insurers could, were they so minded, certainly do
much to facilitate the introduction of new nonpolluting technology, thereby
helping to achieve a stable global situation in which they would be better
able to predict the risks they would be facing – risks that were contained
at a level that made underwriting a science rather than a lottery.’

Jeremy Leggett is scientific director of Greenpeace International’s climate
campaign and has acted as an adviser to insurance companies on climate
change.

* * *

1: Anatomy of a storm

Tropical storms begin as small, innocuous areas of low pressure, often along
the Inter-Tropical Convergence Zone, where air from the northern and
southern hemispheres meets. Under the right conditions, these depressions
can grow spectacularly, fuelled by the transfer of heat from the hot ocean
to the atmosphere.

At present, tropical storms occur in relatively few places and only at
particular times of year – specifically on the western sides of the major
oceans, between 5 degrees and 20 degrees from the equator and at the end of
the hot season. Another controlling factor is that the surface of the sea
has to be warmer than 27 °C to provide sufficient heat energy for a
hurricane to form. It also seems that the air pressure and wind speed must
be low at ground level but high aloft for the hurricane ‘vortex’ to develop.

Air is drawn into the small depression, rises and cools. Cool air can hold
less moisture, so the water vapour within it condenses out as rain droplets.
The condensation releases large amounts of latent heat. If the release of
latent heat is concentrated in a small enough area, it will trigger a fall
in air pressure at the surface, intensifying the depression and increasing
the amount of air sucked into the system. The converging air picks up more
moisture from the warm ocean, rises and releases more latent heat.

The rotation of the Earth then imparts spin to the rising air, creating a
small, tightly enclosed and increasingly intense area of storm. As more air
is heated, often over several days, the storm gathers in intensity until it
forms a hurricane, in which violently destructive winds are common.

Tropical storms are called hurricanes in the West Indies and off Australia,
typhoons in the western Pacific and cyclones in the Bay of Bengal. The most
lethal known storm occurred in the Bay of Bengal in November 1970, when a
storm surge and winds of more than 160 kilometres per hour led to the death
of an estimated half a million people.

Global warming is likely to increase the number of occasions and places that
meet the conditions for tropical storms, with the threshold sea
temperatures, in particular, being reached in more places. Higher sea
temperatures could also make storms more intense. The recent hurricanes
Gilbert, Hugo and Andrew in the Caribbean, and cyclones in previously placid
regions of the Pacific, could be early signs of these trends.

Australian climatologists estimate that a warming of the sea surface by 2
°C to 3 °C would allow cyclones to form several hundred
kilometres farther south around the shores of Australia, threatening cities
such as Brisbane. ‘On average, they might be expected to be up to 20 per
cent more intense, and somewhat more frequent,’ says Barrie Pittock of
CSIRO, Australia’s national research organisation.

Kerry Emanuel from the Massachusetts Institute of Technology has suggested
that the doubling of carbon dioxide levels in the atmosphere expected late
next century is likely to lead to ‘a 40 to 50 per cent increase in the
destructive potential of hurricanes’. Rising sea levels and more intense
storms could combine to make many tropical coastal areas uninhabitable.

Fred Pearce

* * *

2: Is the climate right for change?

To his colleagues, George Roberts is known as ‘the king of catastrophes’ –
not because he causes them, but because among Lloyd’s brokers he knows how
to assess the risk of them occurring and how to parcel out the risk among
other insurers. So does he think that the industry can create a more
pragmatic attitude towards global warming by withdrawing insurance cover or
by preferentially investing capital? Not at present, he says, because the
industry is too disparate.

‘I talked to Greenpeace recently,’ he says. ‘They were trying to convince
the insurance industry that it would be better to invest in ethical things.
I don’t see differential rating or differential investment (by which
insurers would completely pull out of certain areas) being a runner because
the industry’s not structured that way. I wish it was, because I am a
Greenpeace fan.’

He cites the banks’ high interest rates on Third World loans, which were
caused by insurers charging high premiums to cover against defaults. They
perceived loans to developing countries as a high-risk activity. It became a
self-fulfilling prediction. ‘Third World debts exist because of the
insurance industry’s pressure on banks,’ Roberts notes.

Richard Keeling of the Lloyd’s syndicate of Harvey Bowring is also noted for
his skill in assessing risks. He points to another problem for the
insurance industry in trying to cope with global warming. Insurers are
unlikely to be effective, he says, because of their lack of organisation,
especially compared with the lobbying efforts of companies whose profits
would be threatened by any reduction in the use of substances that lead to
global warming.

‘The insurance business is not a good lobbyist because it’s so diffuse,’ he
comments. ‘Worldwide there are thousands of insurance companies. We are a
trillion-dollar business – about the same as the oil companies, actually.
But they are a trillion-dollar business run by ten people. We’re run by a
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This is confirmed by lobbyists and those who would expect to be lobbied over
issues affecting global warming, especially carbon and energy taxes proposed
in both the US and the European Community. In Britain, the Department of the
Environment was quite surprised by the suggestion that anyone from the
insurance industry might have put forward any views when the question of a
carbon tax was being discussed by Community ministers. The same
uncoordinated approach emerged in the US.

In comparison, the oil companies are supremely well organised. When the
Community proposals for a carbon tax were put forward, the British oil
company BP was able to muster thoughtful papers explaining why its
researchers had determined that the tax would not achieve its declared
objective of reducing carbon dioxide emissions. ‘We have people who look at
potential future legislation coming our way and at what we should be doing,’
says Steve Powell, a chemical engineer by training who works as a policy
adviser for BP Exploration in the field of health, safety and the
environment.

Lobbyists for the insurance industry have been noticeably absent, he agrees.
But he feels that insurers are now waking up to the problems ahead. Some
would say not before time: in the past six years, insurers have paid out
more than $50 billion worldwide in catastrophe insurance.

Despite the reservations of Roberts and Keeling as to whether the insurance
industry can reduce the impact of global warming, they are taking notice of
what Greenpeace and other environmentalists are saying. Insurers, says
Keeling, need to work closely with environmentalists because ‘we are both
in the business of controlling risks’.