Climate for Change: An Actuarial Perspective on Global Warming and its Potential Impact on Insurers

As the debate over global warming rages, actuaries may be able to play a greater role in evaluating the merits of the opposing views and contributing to climate research itself. Since hurricanes Hugo and Andrew, insurance companies have had to fundamentally rethink pricing, underwriting and financing for catastrophic weather-related coverage. Insurers also have had to consider whether these events were just a harbinger of things to come. If these storms presaged a changing climate, what could insurers do to prepare themselves for future catastrophes and improve their assessment of future risks? At the Conference on Climate Change and the Insurance Industry in 1993. Frank Nutter, president of the Reinsurance Association of America, drew much attention in the insurance and environmental press. In 1995, Nutter joined officials from six other major U.S. insurance organizations to discuss climate-related threats with Vice President Gore and experts on climate change. (The other organizations included: Companies.) Following their inquiries, they pledged to explore mitigation and sustainable energy strategies. While these U.S. insurance groups began discussing the issue of climate change, an international coalition of major insurance and reinsurance companies was forming to address climate and environmental issues. Since late 1995, more than 81 companies from 25 countries have signed the United Nations Environmental Programme's (UNEP) Statement of Environmental Commitment for the Insurance Industry, and have publicly endorsed the necessity for action to reverse the causes of climate change. These insurers have been involved in each of the "Conferences of the Parties" meetings on climate change (Berlin, Geneva and Kyoto). Some of these insurers participated in the Intergovernmental Panel on Climate Change (IPCC) process, and authored an extensive chapter in its "Second Assessment Report." The IPCC, organized by the World Meteorological Organization and UNEP, includes over 2,500 scientists and experts from 55 countries. Among these IPCC participants, Munich Re was the first to publicly show its concern about the climate change issue with its 1990 Windstorm report. Gerhard Berz, Munich Re's climate scientist, later warned that the insurance industry should not adopt the attitude that it can adjust to a changing climate. Rather, according to Berz, "it is to be feared that climate change will produce in nearly all regions of the world new extreme values of many insurance-relevant parameters that will lead to natural disasters of unprecedented severity and frequency." Berz concludes that "the insurance industry.. . must demand that political decisions are taken on