Reinsurers watch rising tides and temperatures

The New York Times News Service (Feb. 16, 2004)

PHOTO: Sarah Burge Small sea level rises caused by global warming could have a catastrophic effect on coastal cities like New York, seen here from New York Harbor.

The worst-case scenario would be a powerful hurricane that hits New York City in 2080.

The storm is so powerful it wipes out much of the city's infrastructure located close to the coast -- airports, bridges and subway and train tunnels. Monetary damages alone reach $250 billion, not counting the loss of life or the disruption to worldwide financial markets from damage to Wall Street, which is only few hundred yards from and a few feet above the waters of New York Harbor.

The storm's power is boosted by a 10-degree increase in global temperatures and sea levels about 3 feet higher than current levels, which multiply the force of the storm and its impact on low-lying and coastal infrastructure.

Such a scenario is not only possible, it seems scientifically probable, according to reports on the effects of global climate change.

The widespread use of new climate models that predict the impact, power and frequency of storms, combined with several years of costly weather events have made the reinsurance industry better prepared and more concerned with global climate change.

While politicians argue about the possible causes and impacts of global warming and the best strategies to stop or mitigate it, the reinsurance industry is paying particular attention to predictions of global climate change before they have to foot the bill for a cataclysmic storm.

Reinsurance companies, which insure primary insurance companies against events like catastrophic storms, have been watching increasingly powerful storm surges and other effects of global warming with a growing anxiety, because it is these companies that pay out when storms and disasters strike.

"For many years we have been warning about the elevated danger of heat waves and the associated problems and risks," said Dr. Gerhard Berz, chief of Munich Re's Geo Risks Research Department. "Warmer summers mean a rise in the intensity and frequency of severe weather events."

More than 50,000 people were killed in natural catastrophes worldwide last year, almost five times as many as in the previous year, according to the report.

The U.N.'s Intergovernmental Panel on Climate Change estimates that sea levels will rise by a meter in the next century. Higher global temperatures will have the combined effect of dramatically increasing the power of storm surges.

"We have to be honest about what the risks are, which is what reinsurance companies are doing," said Paul Kleindorfer, co-director of the Wharton Risk Management Center. "As long as reinsurance companies have good models to give them an accurate sense of the risks year by year, they'll have a good grasp on their areas of coverage."

According to estimates by Swiss Re and Munich Re, natural disasters in 2003 cost insurers $15 billion, up 36 percent from the year before. Total economic losses were between $60 billion and $65 billion, an increase of 9 percent from the previous year.

Environmental groups say insurers are finally realizing the dangers posed by climate change.

"The dangers these companies are concerned about are very accurate to what is going on," said Jessica Holliday, director of the Partnership for Climate Action. "The science is not uncertain; as the weather becomes more volatile and more intense, we will see more intense storms."

Kleindorfer said Hurricane Andrew in 1992 was a pivotal event for reinsurers, forcing them to appreciate the risks that storms posed. Seven primary insurers failed due to the excessive losses caused by the storm.

In the wake of Andrew, scientific research showed that global warming could increase the frequency and potency of such storms, which served as a wake-up call for the industry.

Last summer's heat wave in Germany, for example, "corresponded to a 450-year event in climatological terms. If the atmosphere continues to warm up unchecked, such a heat wave could already become a mere 20-year event by 2020," according to an analysis by Munich Re.

The science of modeling climate risk has also advanced to the point where reinsurers are re-examining the effects of global warming. Newer models utilize data from the past 50 years, during which time the effects of global climate change have become more pronounced.

"The data from the past 50 years indicates evidence that both the frequency and severity of storms are increasing due to the global warming," said Dr. Peter Dailey, head of atmospheric sciences at the AIR Worldwide Corp., a climate modeling firm in Boston. "Traditional ways of looking at the data looked at the last 200 years, which were indicative of a whole different climate regime. This different climate regime was less conducive to powerful storms."

Newer models are better able to assess total atmospheric conditions and better predict potential losses for insurers and diversify their reinsurance risks to protect themselves against catastrophic loss, Dailey said.

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