International
Study estimates impact of climate change on insured losses
By Finfacts Team
Jun 29, 2005, 10:02

A 20 percent increase in the frequency of major European windstorms could result in as much as a 35 percent increase in average annual insured losses

AIR's analysis was conducted for the ABI's special report called The Financial Risk of Climate Change, which was released today at an ABI-sponsored conference in London. AIR also analyzed the potential impact of increased typhoon intensity in Japan and windstorm frequency in Europe on estimated insured losses.

According to the ABI report, possible impacts of climate change include an increase in tropical cyclones storm intensity and European windstorm frequency. The ABI asked AIR to determine the impact of these potential changes in storm characteristics on insured losses.

"The causes and effects of climate change are still the subject of much debate within the scientific community," said Dr. Jayanta Guin, vice president of research and modeling, who headed up AIR's analysis. "While there are certainly ways in which global warming could potentially affect the frequency and severity of tropical and extratropical cyclones, there is still no scientific consensus on what the impact will be. What is clear, however, is that the relatively small increase in average wind speeds predicted by some scientists would produce a significant increase in insured losses."

The AIR analysis determined that a 6 percent increase in average wind speeds from tropical cyclones, such as U.S. hurricane and Japan typhoon, could result in as much as a 60-75 percent increase in insured losses per year. A 20 percent increase in the frequency of major European windstorms could result in as much as a 35 percent increase in average annual insured losses.

"While the result from increased storm frequency should not be surprising, the large increases in losses from a small increase in wind speeds may be less intuitive," said Dr. Guin. "From an engineering perspective, however, it comes as no surprise. Property damage can increase at almost exponential rates once certain wind thresholds are reached."

The ABI’s report, Financial Risks of Climate Change, shows that the projected additional costs can be reduced if governments take action now to:

• reduce carbon emissions. This could save up to 80% of the predicted extra costs;
• continue to improve coastal defences and flood protection inland; and
• change building codes to ensure more weather – resilient buildings.

Speaking at an ABI international conference today, Nick Starling, ABI’s Director of General Insurance said:

“Managing the effects of climate change is a key issue for the 21st Century. Insurance is a messenger of change for future risks, as well as a provider of financial protection against the unforeseen. Governments now have a chance to make rational choices for the future, before it is too late. Making the right decisions based on first class assessment of the financial costs of climate change will ensure lower costs for the public in future.”

The report shows that if no action were taken, the climate change scenarios modelled by the Intergovernmental Panel on Climate Change (IPCC) could have the following financial effects by 2080:

• The cost of insured damage in a severe hurricane season in the USA could rise by three-quarters to £82billion ($ 150 billion), an increase equivalent to almost three Hurricane Andrews (the costliest single weather event recorded, occurring in 1992).
• The costs of Japanese typhoons could increase by around two-thirds to reach £19 billion ($ 34 billion). The increase would be double the cost of typhoon damage in 2004, which was the costliest year in the last 100 years.
• The financial costs of flooding could rise in both the UK and the rest of Europe, increasing the annual flood bill by up to £82 billion across Europe.
• Insurance markets could become more volatile. The capital needed by insurers to cover severe storms could rise by £43 billion ($78 billion), with increases of 90% for US hurricanes and 80% for Japanese typhoons.

However, ABI’s report also shows that many of these costs could be avoided by acting now. Under the same IPCC scenarios, by 2080:

• reducing global carbon emissions could reduce the size of insurers’ increased capital requirements for hurricanes, typhoons and windstorms by more than £33 billion ($60 billion) based on the IPCC scenarios;
• strong,well-enforced building codes could prevent and reduce windstorm damage.  For example, if design codes for buildings in the South East of UK were upgraded by 10%, windstorm damage could be reduced significantly;
• improved coastal defences could reduce the global annual damage from a 0.5m rise in sea – level by up to £16billion($30 billion);
• in the UK, effective flood management could save 80% of the costs of flood damage.

The full ABI report is available at www.abi.org.uk/climatechange.