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The U.S. insurance industry is finally taking a closer look at the myriad perils emerging from the growing risk of climate change as it grapples with devastating weather-related losses that topped $100 billion over the past two years.

While European reinsurers have spent a decade examining the hazards associated with the extreme weather events linked to rising temperatures, U.S. insurers needed the enormous losses of Hurricane Katrina to place climate risk squarely on their radar screen, analysts say.

L. James Valverde Jr., vice president of economics and risk management at the Insurance Information Institute in New York City, acknowledges that European insurers have been "out in front" on the climate risk issue for several reasons, including a different sensibility among Europeans on global environmental issues and climate change.

While declining to link climate risk and the industry's soaring catastrophic losses with the potential for industry insolvencies down the road, Valverde says U.S. insurers are noting that climate change was a potential contributor to the increased hurricane activity in the North Atlantic. "The mounting catastrophe losses have been devastating for the property/casualty industry," he adds.

A report on climate change released by Lloyd's of London in June took a harsher view of the industry's attitude toward climate risk, saying insurers had yet to take "changing catastrophe trends seriously enough." In one of its more scathing conclusions, the report states that "the industry can no longer treat climate change as some peripheral work stream, simply to tick the regulatory and compliance box or to support its public relations strategy."

In "Climate Change: Adapt or Bust," Lloyd's offers an unvarnished view on how greenhouse gases; sea, land and air temperatures; sea levels; and rain and snow are reverberating throughout the industry. On the issue of greenhouse gases, for example, the report says that "the insurance industry must start actively adapting in response to greenhouse gas trends if it is to survive."

So far, the insurance industry has survived the fallout from Katrina, which ran up losses of $45 billion in 2005, according to a report released in August by Ceres, a national coalition of environmental groups and investors. But the question on many people's mind is how long insurers can sustain such tremendous expenses.

"If there are more severe losses every year, it takes away the industry's ability to rebound--its elasticity," says Chris Walker, U.S. director of The Climate Group, an international nonprofit of corporate and government interests. He explains that insurers need several years of higher prices and mild weather-related events to recoup their losses after a major catastrophe. "It slams the industry's ability to recoup."

And it is not only the huge payouts for property losses that have observers worried.

Insurers face potential liability claims if "creative plaintiff lawyers" file lawsuits against corporations emitting the pollutants that contribute to the greenhouse gases that shift weather patterns, adds Walker, who previously headed Swiss Re's sustainability business development division. Insurers could then be forced to ante up for their commercial clients, as many did for asbestos manufacturers. Meanwhile, health and life insurers are anxious about weather trends that produce stronger mosquitoes and more resilient strains of malaria, for example, or catastrophes that lead to unique illnesses, like the so-called "Katrina cough" that has emerged among people exposed to pollutants in New Orleans.

Using figures supplied by the Insurance Information Institute and Swiss Re, the Ceres report shows the $45 billion Katrina loss was a significant chunk of the $71 billion hit that U.S. insurers took in 2005 due to weather-related catastrophes. In 2004, U.S. industry losses from weather-related catastrophes tallied $32 billion.

"From Risk to Opportunity: How Insurers Can Pro-actively and Profitability Manage Climate Change," the Ceres report, outlines the challenges that global warming and the spread of less predictable weather events are creating for insurers. "The scope of the damage from Katrina forced a reassessment," says Andrew Logan, director of Ceres' insurance program. "In the last year to eight months, there's been a change in how the leadership of U.S. companies has been looking at climate risk."

Two days before its annual meeting this spring, American International Group Inc., for example, became one of the first major U.S. insurers to adopt a policy on climate change. While plans were in the works for several years, the giant insurer announced it was developing products and services to help the company and its customers be part of the global effort to cut greenhouse gas emissions. The New York City-based insurer set up an Office of Environment and Climate in May to coordinate its environmental and climate change program.

A month earlier, in April, global insurance broker Marsh published a report on climate change that warned its clients of the phenomenon's hazards while pointing out market opportunities in various industries.

"The brokers are stimulating demand for products. At the same time, they are also sending out signals to the primary insurers that the corporations want products to help them manage their climate risk," says Logan.

Acting as a messenger on the risks of climate change--a factor behind the work of European reinsurers like Swiss Re and Munich Re for many years--is also one of the messages in the Ceres report. Just as it took the lead decades ago to minimize the risks from building fires and earthquakes, the insurance sector can now contribute to global efforts to curb the growth of greenhouse gas emissions.

"The insurance industry is one of the biggest industries in the world, and affordable insurance is a key to a functioning economy," adds Logan. "Insurers are well positioned to carry that message to the government."

And insurance regulators are taking note. The Task Force on Climate Change of the National Association of Insurance Commissioners met for the second time when it convened in St. Louis in September to look at issues impacting the industry. The task force was created in December of last year. Ironically, the association's quarterly meeting, scheduled for New Orleans a week after Katrina struck the Southern city, included a panel on climate change. Former U.S. vice president and environmentalist Al Gore had been invited to attend.

"Katrina put the focus on climate risk. We know we can't do anything about the weather or the climate," says Tim Wagner, director of insurance for Nebraska and co-chairman of the task force. "But what we can do is take actions to modify or minimize the risk of climate change."

Wagner said he didn't foresee any industry insolvencies as a result of climate risk as insurers take steps to keep themselves financially viable.

But Logan says investors have been "asking questions around the economics of climate change."

Ceres also coordinates the Investor Network on Climate Risk, which institutional investors created three years ago to boost understanding of the financial risks and investment opportunities posed by climate change. Nearly 30 members of the 50-member network, which controls as much as $3 trillion in assets, asked U.S. regulators in June to require publicly traded companies to disclose the financial risks of climate change in their public documents. While Securities & Exchange Commission Chairman Christopher Cox declined a request for a meeting, the group was scheduled to meet with SEC Commissioner Roel C. Campos in late September.

In its latest report issued in September 2005, the environmental group Friends of the Earth showed that property/casualty insurers are doing an extremely poor job of disclosing risks related to climate change in their SEC filings on material risks. Only 15 percent of the 106 surveyed insurers referenced climate change issues in their SEC filings, compared with 96 percent of surveyed utilities and 74 percent of the integrated oil and gas companies--two other sectors with notable exposures to climate risk.

Publicly traded insurers could suffer financially if their stock price plummets as investors lean away from industries with heavy exposure to climate risk, analysts agree. At the same time, insurers' precious investment income could head south if their investments in equities and bonds turn sour as climate risk and subsequent regulatory changes hurt the bottom lines of other industries.

"It could all have a cascade effect," says Walker. "It could be a perfect storm."

PAULA L. GREEN lives in New York City.

November 1, 2006

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