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Climate Change and Insurance: an Agenda for Action in the United States

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Climate Change and Insurance: an Agenda for Action in the United States Climate Change and Insurance: An Agenda for Action in the United States A publication of Allianz Group and WWF, October 2006 FOREWORD Climate change poses significant risks throughout the United States, particularly to coastal, flood-prone and fire-prone areas . Allianz and World Wildlife Fund (WWF) are working together to understand and better manage the true risks of global warming. Without examining how global warming could intensify risk it is impractical for Allianz, WWF and our peers to carry out long term planning to protect assets. The insurance industry has a two-fold responsibility. On the one hand, it needs to prepare itself for the negative effects that climate change may have on its business and on its customers. On the other hand, it can significantly help mitigate the eco- nomic risks and enter the low-carbon economy by providing appropriate products and services. Allianz Group and WWF have joined forces to produce a report that will advance the debate in the insurance industry, and propose solutions. The report identifies risks for the sector, emerging physical impacts that will likely be amplified with climate change, and develops actions that demonstrate how insurance providers, such as Allianz Group, can respond to these risks in a meaningful and responsible manner. Implementing these actions will mean big steps forward, developing sound practices business for a living planet. WWF and Allianz Group will work together to implement the actions of this report and to take responsible steps to help solve this global problem. Allianz and WWF strongly believe that companies that are ready to seize these new opportunities will ultimately be able to reap benefits for society and for their shareholders. This cooperation in the United States between Allianz and WWF is a second mile- stone since the 2005 launch of Climate Change & the Financial Sector: An Agenda for Action in London. In markets around the world WWF and Allianz are raising awareness about climate change in the financial industry and fostering a dialogue aimed at improving the management of environmental risks. New York, October 2006 Carter S. Roberts Clement B. Booth President, WWF US Member of the Management Board, Allianz SE Climate Change 3 CONTENTS Foreword 3 Executive Summary 5 Introduction 9 1 The Science of Climate Change’s Physical Impacts 11 1.1 Climate Change Science 12 1.1.1 The scientific certainty 12 1.1.2 Regional impacts of climate change 12 1.1.3 Climate change modeling 13 1.1.4 Climate science and the financial industry 13 1.2 Rising Sea Level 14 1.2.1 Causes and extent of sea level rise in the United States 14 1.2.2 Projected effects 15 1.2.3 Economic impacts 16 1.3 Forest Fires in the American West 17 1.3.1 Link between climate change and increasing incidence of fires 17 1.3.2 Projected effects of climate change on incidence of fires 18 1.3.3 Economic impacts 18 1.4 Flooding in the United States 20 1.4.1 Link between climate change and flooding 20 1.4.2 Projected effects 20 1.4.3 Economic impacts 22 1.5 Hurricanes 23 1.5.1 Climate change and hurricanes 23 1.5.2 Economic impacts 24 2 U.S. Insurance and Climate Change 26 2.1 Insurance 26 2.1.1 Physical impacts’ effect on insurers 26 2.1.2 What U.S. insurance companies are doing to address climate change risks and opportunities 27 2.1.3 U.S. examples of specific insurance solutions to tackle climate change risks 33 2.1.4 Recommendations 34 Endnotes 38 Acknowledgements 45 4 Climate Change EXECUTIVE SUMMARY Executive Summary This report builds upon Climate Change and the occurred since 1990. 2005 was the hottest year in Financial Sector: An Agenda for Action released in over a century.1 Global warming will continue – Europe in June 2005, and is the first report of its and is likely to accelerate – as more GHG’s accu- kind that attempts to overlay a detailed distilla- mulate in the atmosphere. tion of climate change science with U.S. insur- Studies show that rising temperatures in ance industry activities around climate change. recent years have likely contributed to an increase This report aims to go beyond an investigation of in the frequency and severity of natural disasters only hurricanes to also address the implications such as tropical storms and hurricanes, of which for the U.S. insurance industry of other impacts there were a record 27 in the Atlantic in 2005. of climate change including forest fires, floods, These and other changes will have consequences and storm surge (although storm surge is not for the United States. commercially insured, this report describes how The U.S. business community is beginning to government insurance backstops interact inti- recognize that climate change is likely to cause mately with commercial insurance products and physical and weather-related risks in the future, with consumer perception of risk). as well as regulatory, competitive, and reputa- The report finds that U.S. insurers are far tional risks. The vice-chairman of Merrill Lynch ahead of many of their overseas counterparts in recently declared “we are conducting an enor- assessing current catastrophic (cat) risk through mous chemical experiment with potentially huge sophisticated cat risk modeling that is based on consequences for our environment, for our historical weather events; however, U.S. insurers economies, and for human life.”2 And Goldman appear to lag behind their European peers who Sachs agrees: “We believe climate change is one have begun to conduct studies of climate change of the most significant environmental challenges and are beginning, though slowly, to incorporate of the 21st century and is linked to other impor- future climate change scenarios into cat risk tant issues such as economic growth and develop- models, particularly for flooding. ment, poverty alleviation, access to clean water, and adequate energy supplies.”3 NATURE OF THE PROBLEM Within the last two centuries, human activities This report presents: have led to an increase in greenhouse gases 1) the current state of the science regarding (GHG), such as carbon dioxide (CO2), in the the regional impacts of climate change in the atmosphere that are trapping the sun’s heat like a United States, with particular focus on floods, blanket, warming the Earth’s climate and causing storm surge (with some discussion of related “global warming.” hurricanes), and forest fires, and Since the industrial revolution, the Earth’s 2) the impacts on, actions of, and recommen- average temperatures have increased substan- dations to insurers and the U.S. insurance tially and rapidly from a historical perspective, industry. and all ten of the hottest years on record have Climate Change 5 EXECUTIVE SUMMARY The main findings of this paper are as follows: ¼ There is rapid and substantial population growth and building investments in areas at risk SCIENTIFIC FINDINGS from the hazardous effects of climate change, ¼ Global sea level rise is projected to increase by a particularly catastrophic events such as hurri- minimum average of 0.28 m in this century. canes, storm surge, and forest fires. This rapid Even small amounts of sea level rise contribute development significantly compounds the to increasingly dangerous storm surge and potential physical impacts of climate change. more vulnerable levee systems as was seen in Federal and state run insurance programs, espe- New Orleans in 2005. Over the next five cen- cially the National Flood Insurance Program, turies, catastrophic sea level rise of up to 6 m have artificially low insurance premiums that could inundate many U.S. coastal cities, and have encouraged building in high risk areas by large portions of coastal states. distorting the natural market signal that high ¼ The risk of forest fire is exacerbated by current risk equals high premiums. climatic trends in many parts of the United ¼ The available scientific information predicting States. Higher temperatures, drier conditions, the consequences of climate change and chang- and success in fire suppression over the recent ing weather is being underutilized by the U.S. decades have resulted in high fuel loads. Exac- insurance industry to manage the risks and cap- erbated by the increased wildland/urban inter- italize on the opportunities. With a few notable face all lead to a greater risk of increased losses exceptions, there is little evidence that industry from wildfires. behavior is changing significantly to adapt to ¼ Climate change is affecting the hydrological this growing risk of the physical impacts of cycle, which also affects floods. Glacial melting climate change. is increasing, snowmelt is occurring earlier, and on average, there is an increase in “rain-rather- INSURANCE INDUSTRY FINDINGS than-snow” winter precipitation, all factors con- ¼ U.S. insurers have suffered significant losses tributing to early spring floods. Combined with from catastrophic events. Catastrophe losses distorted market signals as a result of govern- have been doubling every ten years as a result ment subsidized flood insurance, flooding will of the surge in building along coastlines and likely continue to generate major economic other high-risk areas, and the industry has suf- losses. fered tens of billions of dollars in payouts and ¼ Warmer sea temperatures are likely to increase many companies have gone out of business as a the intensity of hurricanes which are the most result of weather-related losses such as 1992’s devastating form of natural catastrophe in Hurricane Andrew. Climate change is expected the United States. Although some scientists to exacerbate these economic challenges. contend that the recent rise in intensity of ¼ U.S. insurance companies have sophisticated hurricanes is a result of Atlantic Multidecadal catastrophic risk modeling tools that could be Oscillation, more and more studies are linking used to better understand climate change’s climate change to the warmer sea temperatures impacts.
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