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Climate Risks Rise, Reinsurance Companies Take Notice
By Steve Schueth

With most of the country experiencing a very short and extremely mild winter this year, even skeptics may be wondering whether the climate scientists have got it right.

But you can bet that insurance companies are adjusting their risk calculations. Extreme weather events in 2011 resulted in a record 99 declarations. The U.S. property and casualty insurance industry suffered an extraordinary $44 billion in catastrophe-related losses last year.

Insured losses in the U.S. from weather disaster have soared from an average of about $3 billion a year in the 1980s to about $20 billion a year in the last decade, even after adjusting for inflation, according to Mark Way, director of sustainability at reinsurance giant Swiss Re.

At a Capitol Hill press conference on March 1, 2012, members of the reinsurance industry—defined by the Reinsurance Association of America (RAA) as "insurance for insurance companies"—called for meaningful action by policymakers to address the reality of climate change.

At the press conference, Senator Bernie Sanders of Vermont said, "People in the business community are speaking out about the risks associated with global warming. Perhaps no industry better understands the impact of global warming than the insurance industry, whose job it is to analyze risk."

"Demographics and coastal urbanization are catastrophic force multipliers making weather events increasingly more costly," Pete Thomas, Chief Risk Officer at Willis Re, said.

Why Have U.S. Insurers Been So Quiet?

If there's one industry that ought to be concerned about the threat of global warming, it's the insurance industry. When extreme weather causes damage, they pay.

Dave Jones, California's insurance commissioner, put it this way: "Climate change is an obvious physical threat to us all, but increasingly it also poses a serious financial threat to the insurance industry.

So, one might expect insurance companies to be calling for regulation of greenhouse gas emissions—to slow and maybe, eventually reverse global warming. And it would also be reasonable to expect insurance companies to steer some of their massive investment assets to clean energy or energy efficiency projects. But no, on both counts.

Insurance companies are all about risk, but unlike the big European reinsurance companies, insurance companies in the U.S. appear to be unwilling to risk speaking out about climate risks.

Of course, with such a heavily politicized issue, insurance companies may see no gain in talking about a topic that many consumers are confused about and, in some instances, downright hostile to.

Maybe more importantly, it should be understood that property/casualty companies write liability coverage for corporations that are being sued, or likely to be sued over climate related damages (e.g. oil and coal companies). It’s likely that they will find themselves in court arguing that climate change isn’t really causing all those damages.

But there is a group of U.S. companies—including Nike, Starbucks, and Levi Strauss—that are speaking out. They are members of BICEP, Business for Innovative Climate & Energy Policy, which is “working to pass meaningful energy and climate legislation that will enable rapid a transition to a low-carbon, 21st century economy.”

NOTE: Mention of specific companies or securities should not be considered a recommendation to either buy or sell that security.  For information regarding the suitability of any security for your investment portfolio please contact your financial advisor.

Posted: April 9, 2012