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The Star-Ledger: A Q&A on ... disaster insurance

Hurricane Sandy has shuttered — and shredded — businesses throughout New Jersey. It’s the type of storm that climate change experts have predicted: Bigger. Nastier. Worsened by higher water temperatures and heavier moisture in the air.

Hurricane Sandy has shuttered — and shredded — businesses throughout New Jersey. It’s the type of storm that climate change experts have predicted: Bigger. Nastier. Worsened by higher water temperatures and heavier moisture in the air.

As severe weather wreaks more havoc, business leaders, be they conservative or liberal, are seeing the impact on their bottom line. When Hurricane Katrina devoured the Gulf Coast in 2005, sweeping away roads, power lines and entire buildings, hundreds of thousands of people were left jobless. It led to a severe cutback in consumer spending and tax revenues.

Andrew Logan, director of the insurance program for Ceres, a nonprofit coalition of investors and environmentalists, spoke to Star-Ledger editorial writer Julie O’Connor last week about the scary economics of our wilder weather.

Q. You say we shouldn’t write Hurricane Sandy off as a freak storm, or anomaly. Why?

A. We’ve seen unusually severe weather over the last several years, everything from droughts to wildfires. That’s characteristic of climate change. We know that it puts more energy into storms, more rainfall. And we know it’s raising the level of the ocean and making storm surges worse.

What we’re seeing with events like Hurricane Sandy is a triple-whammy of warmer oceans, more rain and higher sea levels. It’s what the future might look like if we don’t get climate change under control.

Q. Why should the insurance industry be worried?

A. Insurance makes the world go round. You can’t buy a house or run a business without insurance. Our concern is that climate change threatens the availability and affordability of insurance, which has real negative implications for the broader economy. The insurance sector is potentially on the hook for the physical costs of more extreme weather. If insurers don’t plan for those increased impacts, the worry is that insurance won’t be there in the future when we need it, or affordable to consumers.

Q. What does this unpredictability mean for future

A. It’s a major risk. The industry is built on the expectation that even extreme weather is, in some measure, predictable over time — that the past could guide the future. Insurers take historic trends around weather and project those forward. That’s worked well for a century or more, but is turning out not to work in a world where climate change is running rampant.

The first principal of insurance is to understand the nature of the risk. That’s why climate change really threatens to undercut the industry’s entire business model. If the industry doesn’t feel like it understands the risk, then it really is impossible to provide coverage.

Q. What catastrophes have caused the biggest economic losses?

A. The biggest single event losses tend to be hurricanes. Katrina was the largest. But increasingly, there’s nowhere to hide from disaster in the U.S.
In the past, our concern focused mostly on hurricanes in the South. But now, we’re seeing expensive disasters in the Midwest and the West: droughts, wildfires and flooding. We’re seeing hurricanes in places like the Northeast, where we rarely saw them previously. The whole country seems to be becoming more vulnerable to extreme weather.

Last year was a record year — we had 12 events that each cost over a billion dollars in damage. Almost all of them were not hurricanes; they were tornadoes, they were wildfires, they were floods. And they happened in places like the Midwest, away from the coast, which you think of as being not as vulnerable to climate change. Which indicates just how much extreme weather is changing.

Q.Are taxpayers assuming more of these losses?

A. The trend of the last decade, of risks being shifted from the insurance industry to taxpayers, is a huge concern. As insurers have become less willing to cover high-risk areas, the government has had to step in and create its own insurance pools. This is the case in many states on the coast. Often, they’re set up in a way that even taxpayers who are not from the coast will end up having to pay. If there’s a high loss, there’s essentially a surcharge on all policyholders in the state, or it channels through the state budget.

The fact that the largest insurer in the state of Florida is the state of Florida ought to raise concern for anyone who worries about the fiscal health of the U.S. The government has taken on the highest risk in places like the coast, and also owns most of the risk related to the flooding through the national flood insurance program, which is already something like $20 billion in debt. In a storm like Sandy, where so much of the damage is water-related, it will be taxpayers picking up most of the damage. Where it’s more wind-related, that would fall mostly to the private market.

There’s a lot of momentum to reform the national flood insurance program. It’s set up in a way that doesn’t provide enough incentive for people to not live in harm’s way. The liability for taxpayers is increasingly becoming untenable.

Q. As wild-card disasters occur more often, what kinds of things will insurers no longer cover?

A. That’s the great unknown. What will the reaction of insurers be?
Our hope is that rather than being reactive to storms like Sandy and pulling out of those areas, that insurers will be proactive and work with policyholders to make them resilient to the next storm that comes.

The insurance industry has a history, stretching back 100 years, of helping society adapt to risk. There’s a strong role for them to play here, as well. Insurers could provide financial incentives for greater resilience by giving discounts for things that make homes less risky.

Q. Could insurers more effectively motivate society to reduce risks than government?

A. That’s our belief. We think insurers have strong financial reasons to want society to be much more aggressive in preparing for, and preventing, climate change. The buck really does stop with them. We are seeing some insurers take strong stands and push for greater action, both to adapt to climate change and to prevent its worst impact. Like the German insurance company Munich Re, which has its North American headquarters in Princeton.

Q. The business community complains loudly about taxes and regulations. What about the financial losses from climate change?

We are seeing an increasing movement by business leaders and investors to advocate for more aggressive measures on climate change, because it really impacts their bottom line. But I’m surprised it’s not louder than it is. The number of businesses that will be negatively impacted by climate change far outweigh those that might see risk from regulation.

We are moving toward a tipping point where the financial case for action on global warming is overwhelming.

Q. But when will that happen? And will it be too late?

A. I think we’re closer than many think. I’ve seen a real sea change over the last year or two in the degree of concern among insurers. We’re not that far from hitting a critical mass. You think of the insurance industry as being quite conservative and Republican, but this is really about the bottom line, not just about the environment.
It’s an issue that ought to unite both left and right.

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