Burned By Warming

By EUGENE LINDEN

Even before the storm that trampled through the East Coast of the U.S. last week, the 15th such tempest in the nastiest winter in recent memory, American insurance companies had forlornly concluded that all their carefully calculated predictions about the world's weather have been blown way off course. Aetna Life and Casualty announced last Monday that first-quarter earnings would plunge $120 million -- in part because of claims related to January and February's weather. Industrywide, weather-related claims for these two months may total $825 million, on top of $1.75 billion in insured losses caused by the monstrous winter storm that battered 24 states in March a year ago and $19.5 billion in losses caused by Hurricanes Andrew and Iniki in 1992.

That kind of hemorrhaging tends to draw executive attention. While scientists debate whether and when global warming will occur, property insurers are suffering the consequences of a climate that they believe is already changing, at least in terms of financial risk. Storms, floods and droughts are hitting populated areas with greater frequency and severity than predicted by actuarial analysis of the past 100 years. Natural disasters during the '80s, for instance, were 94% more frequent than in the 1970s. While it is possible that such a jump falls within normal climatic variation, insurance executives realize that it also conforms with patterns predicted for global warming.

PREDICTION: As warming heats the oceans, the area of water warm enough to produce hurricanes (water temperatures above 80 degreesF) will expand, producing longer and more intense storm seasons.

REALITY: The area of ocean where surface waters are warmer than 80 degreesF has already expanded one-sixth during the past 20 years.

PREDICTION: Sea levels will rise as warmer oceans expand and ice caps and snow cover melt.

REALITY: During the past 100 years, the sea level has risen 1 ft. along the U.S. Atlantic Coast, causing beaches to recede between 200 ft. and 300 ft. on average. Stephen Leatherman, director of the University of Maryland's Laboratory for Coastal Research, says sea level is now at the highest mark in the past 5,000 years and is rising as much as 10 times as fast as before.

Faced with such unsettling coincidences, some key industry figures have begun to wonder whether they aren't seeing a preview of the costs climate change may impose on society. "The insurance business is first in line to be affected by climate change," says Franklin Nutter, president of the Reinsurance Association of America. "It is clear that global warming could bankrupt the industry." Insurers must set their premiums in anticipation of future calamities, Nutter and his colleagues know, and when they look ahead, they see prospects even more alarming than those in the recent past.

With sea level expected to rise an additional 5.7 in. to 7.7 in. during the next 20 years, beaches will continue to retreat, diminishing the sand barriers that protect $2 trillion worth of insured property along the Atlantic and Gulf coasts of the U.S. A study by Travelers Corp., based in Hartford, Connecticut, estimates that even a modest 0.9 degreesF increase in average global temperature by the year 2010 could produce a 20-day extension of the hurricane season, a 33% jump in hurricane landfalls in the U.S., an increase in the severity of the storms and a 30% annual rise in U.S. catastrophic losses.

Projections like that could easily swallow up the $160 billion the industry has in reserve for catastrophes. A hurricane that squarely hit both Miami and Fort Lauderdale could cost insurers as much as $100 billion. Even a small strengthening of storm winds could produce dramatically higher insurance claims. By one estimate, a wind-speed increase of only five knots would have doubled the $3 billion in losses incurred during a 1987 storm in Europe.

These risks and the crucial role played by the $1.41 trillion insurance industry in the global economy could change the dynamic of the debate about global warming. Last fall Nutter told an industry conference that climate change is an issue in which it may prove to be in the industry's interest to assume an advocacy role. In Europe insurance giants have already begun to lobby governments to take action, but in the U.S. the alliance between insurers and greens remains in the courtship phase. Nutter has invited Jeremy Leggett of Greenpeace to speak to his association about the threat global warming poses to the industry. For their part, environmentalists are praying that insurers will become their corporate Lancelots, challenging energy- industry attempts to sow doubts about global warming.

Insurers have already had an impact on the debate about climate change through their actions in the marketplace. Soaring premiums and insurance cancellations alert residents of coastal areas that changes in weather patterns can have profound economic consequences. With 50% of the U.S. population living within 50 miles of a coastline, ordinary people may also begin to draw a similar connection between climate change and their own well- being, should the windstorms continue.