Climate chaos: heated arguments on the preparedness of the insurance industry swirl around a vortex of rising property losses due to climatic upheavals

Risk & Insurance, March, 2004 by David Kosub

For just a moment David Wilmot abandons the cautionary note he has sounded for the past half-hour and talks about his dirt road. The road is one that for years he and his family had no trouble navigating as they made their way to the cottage north of Toronto for their annual summer vacation.

Wilmot, a senior vice president in the Toronto office of Toa Reinsurance, says he and his family eventually came to take the road for granted. "I just never thought about it until the rains came," he says. The rains he's talking about aren't damp northern drizzles. They're heavy, torrential downpours of epic proportions. "It doesn't just rain up there anymore," he adds. "These days we have biblical rain." As a result, the rains have washed out the road every year for the past seven years.

Wilmot underscores what has become a fundamental truth for meteorologists and insurers alike: that stories about apocalyptic flood, giant windstorms and massive drought are just that--stories--largely anecdotal testimony about singular events.

Recent, localized bad weather seldom indicates a trend and singular events are normally unreliable as predictors of future bad weather or the losses that might occur. "Each time you try and point to one loss and say it paints a new picture, I think that's very dangerous." says Wilmot. The trouble occurs, he says, when those losses are repeated year after year. "Then that's no longer anecdotal. You have to say something's happened."

Opinions will vary markedly on why rain causes David Wilmot's road to wash out year after year. But the fact that "something's happened" is the one thing that everyone can agree on.

Heat waves kill tens of thousands in France, India and Pakistan; high winds and floods devastate acres of farmland and historic urban centers in Europe; drought turns hundreds of thousands of woodland hectares into kindling and sparks wildfires that consume whole communities in the western United States and Canada.

Not only is something happening, say scientists and loss experts in the insurance industry, it appears to be happening everywhere. But what, and why, is more difficult to pin down.

The main point about all the turbulent weather, of course, is the enormous loss that results. The $500 million that turned to ash in the 2003 Canadian wildfires, half of it insured losses, was second only to the $1 billion suffered in the Quebec ice storm of 1999. These fires mirrored the California wildfires last summer that destroyed 3,500 homes, killed 20 people and resulted in 19,000 claims worth $3 billion.

In Europe, meanwhile, insurers and reinsurers are only now coming to grips with a massive drought that is expected to cause $800 million in insured losses, replicating similar drought related losses that occurred in 1990, 1991 and 1995. The 2003 drought loss comes one year after a massive European flood resulted in $10 billion in damage, with insurers and reinsurers on the hook for $2 billion of that.

Losses due to hurricanes also garnered much ink in 2003. However, Hurricane Isabel ($1.2 billion) and Hurricane Juan ($100 million) don't begin to compare with the $25 billion worth of damage that Hurricane Andrew wreaked in 1992.

Mother Nature is not the only culprit in these massive losses. Homeowners and real estate development bear a lot of the blame as well, as more people are living in hurricane and tornado corridors.

"The first and largest factor that has led to the forty-fold increase in insurance losses over the last four decades," says Wilmot's colleague Paul Kovacs, "has been the growth and the amount of people and property at risk. Population growth is the No. 1 reason for these losses."

You Really Do Need a Weatherman

Trying to understand bad weather and its effects is made more difficult by the misconceptions most of us have about how it occurs. Ask the average person what they know about hurricanes, for example, and you'll be told that a hurricane starts out as a small wind and that we've seen an awful lot of hurricanes lately because of warmer sea temperatures.

Wrong on all counts, says Dr. Andrew Dlugolecki, director of general insurance development at CGNU in London, one of the world's six largest insurance groups. A hurricane, he says, tends to be a conjunction of several things.

"The air, for example, has actually got to be fairly still and there has to be a kind of seed, the remains of an old storm or disturbance lurking around. It's a bit like a pearl in an oyster and the grit inside that starts the pearl building."

In fact, we're seeing fewer, not more, hurricanes, says Dr. Dlugolecki, in part because of the recent spate of El Ninos. El Ninos create shear winds, which blow quite strongly sideways, stirring up all that calm weather so that hurricanes never get the chance to develop. Conversely, adds Dr. Dlugolecki, the existence of El Ninos may reinforce the argument for climate change.

"It may be proving that climate change is happening because climate change is likely to cause more El Ninos in the Pacific, which tend to suppress hurricanes in the Atlantic."