Analysis of insurance-claims data shows that monetary losses due to weather-related natural disasters have increased substantially during the 20th century, even when the monetary values are normalized for inflation. These increases reflect a complex mosaic of changes in demographics, insurance practice, and climate.
Increased losses due to weather-related natural catastrophes in recent years have profoundly impacted the (re)insurance industry. The most significant single impact was the landfall of Hurricane Andrew in South Florida and Louisiana in 1992. This storm generated US$16 billion in insured losses, bankrupted 12 insurance companies, and led to US$400 million in unpaid claims. The unexpected magnitude of insured losses in recent events has led insurers to increase their estimates of future losses. Current estimates place the insured loss from the landfall of an intense hurricane in a major US city at US$50 billion-US$75 billion. This compares to a total pool of capital in the US property/casualty (re)insurance industry of US$200 billion. Reinsurance capital accounts for about 1/10 of this amount.
(Re)insurance industry participants have responded to the magnitude of recent losses in a number of ways. They have raised rates, tightened underwriting restrictions, reduced or withdrawn coverage, and formed new companies that focus on technical analyses of risk. Some of these changes in insurance practice have made it difficult for homeowners (and primary insurers) to obtain insurance coverage at rates they consider affordable.
Moreover, a significant gap exists between the pool of US (re)insurance capital and the estimated future losses from an intense hurricane landfall in a major US city. Recognition of this “capacity gap” has encouraged insurers to supplement traditional forms of insurance coverage by transferring risk to financial markets. These alternative forms of risk transfer include the options and futures contracts offered by the Chicago Board of Trade; the issuance of insurance derivatives (bonds); and the practice of insuring against existing storms (a.k.a. “live cat” coverage). Government-funded insurance programs have also been established. Alternative forms of risk transfer provide new opportunities for climate scientists.
Insured losses from US hurricanes increased in the 1970s and 1980s, during a period when the frequency of intense hurricanes declined. This pattern was due to increased population and insurance coverage in exposed areas, and clearly shows the important role that demographics and insurance practice play in controlling loss amounts. However, analysis of climate data suggests that recent increases in monetary losses associated with some other weather phenomena (e.g., episodes of heavy precipitation) may be at least partly attributable to actual increases in event frequency or intensity. Less clear is to what degree the increased frequency of these extreme weather events reflects natural climate variability as opposed to anthropogenic influences on climate. The answer to this question has important ramifications for the insurance industry. It affects decisions regarding investment strategies, the most appropriate mitigation measures, and the geographic distribution of company portfolios