Category Archives: Climate Change

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Weather Risks Often Overlooked

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Unpredictable weather is a risk that can’t be put off or ignored. In fact, insurer payouts for weather-related catastrophes rose from $15 billion a year between 1980 and 1989 to a staggering $70 billion annually between 2010 and 2013, a study found.

While major weather events are a focus of businesses, small events can still have a big impact, according to The Weather Business: How Companies Can Protect Against Increasing Weather Volatility by Allianz Global Corporate & Specialty.

Even though weather volatility is shown to be rising globally, organizations are still failing to protect their revenue from the risks of changes in temperature, snowfall, wind levels, rainfall and too much sun, the report found. Changes in weather can also impact a number of industries including construction, energy, retail, tourism, food, distribution and transport.

Bad weather, however, is no longer an excuse for company stakeholders. Analysts, lending and rating agencies are increasingly looking at whether weather risks are included in a company’s risk management program, the study found.

Weather risk management can help companies hedge the risk posed by fluctuations in weather, similar to how companies already combat the threats of interest rate and foreign currency exchange movements, the report said.

Supertyphoon Haiyan Devastates Philippines

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Supertyphoon Haiyan strikes the Philippines

Supertyphoon Haiyan hit the Philippines on Friday, leaving at least 10,000 residents dead and hundreds of thousands without reliable food, shelter or water. One of the strongest storms ever recorded, Haiyan’s winds surpassed 140 miles per hour, bringing record storm surges. The full extent of the damage remains uncertain, with communication and transportation severely restricted.

The World Bank has called the Philippines one of the most hazard-prone countries in the world. Closed roads and airports restricted aid efforts after Supertyphoon Haiyan, and communication failures posed some of the greatest challenges to both assessing and recovering from damage.

“Under normal circumstances, even in a typhoon, you’d have some local infrastructure up and some businesses with which you can contract,” Praveen Agrawal, the World Food Program’s Philippines representative and country director, told the New York Times. “Being as strong as it was, it was very much like a tsunami. It wiped out everything. It’s like starting from scratch” in terms of delivering the aid, he said.

The United Nations has set aside over $300 million to help with the country’s recovery from Haiyan over the next six months, and three dozen individual nations and international organizations have pledged financial and humanitarian assistance. The United States recalled thousands of sailors from shore leave back to the USS George Washington, a massive aircraft carrier currently docked in Hong Kong, to use its 80 aircraft to help deliver supplies and evacuate victims in the Philippines’ hardest-hit islands.

Yet with the broad scope of damage to critical infrastructure, the process has been slow. In the major city of Tacloban, for example, the traffic control tower at one of the country’s biggest airports was destroyed, forcing all aircraft to land by sight, further slowing distribution of food and water. Officials opened smaller airstrips, focusing on safely reopening transportation routes as the hundreds of thousands of evacuees continue to face extreme water shortage. This shortage further compounds the dangers authorities face in recovery, as health officials grow more concerned about water-borne diseases. Most notably, the lack of clean drinking and bathing water in crowded evacuation centers brings risk of diarrhea, leptospirosis and dengue.

Officials are looking forward while managing the catastrophic fallout. According to the Wall Street Journal:

Finance Secretary Cesar Purisima acknowledged that the destruction wrought by the disaster on an area that contributes 12.5% to gross domestic product could shave off as much as a full percentage point to economic growth next year, when the government targets GDP expansion of at least 6.5%. He is hopeful that the adverse effect on growth will be cushioned, if not offset, by the reconstruction spending.

“From a fiscal standpoint, we do have fiscal space to spend for reconstruction. The estimates are preliminary, but we need to invest significantly on infrastructure,” Mr. Purisima said.

The New York Times reported:

HSBC Global Research said that the typhoon probably destroyed half the sugar cane production areas in Leyte Province, and that all told, 3.5 percent of the nation’s sugar cane output was probably lost. It also warned of inflationary shocks to the Philippine economy in the coming months, as supply chains are disrupted.

But given the general health of the Philippine economy and the fact that the typhoon affected geographic areas and sectors like agriculture that are not major drivers of the nation’s output, HSBC said, “The economic impact will be limited.”

Citi Research estimated that infrastructure damage will probably run into billions of pesos, exceeding $70 million.

In Warsaw on Monday, some delegates at United Nations talks on a global climate treaty suggested that global warming was responsible for making Haiyan such a devastating storm. Naderev Saño, the chief representative of the Philippines at the conference, told the New York Times, “What my country is going through as a result of this extreme climate event is madness; the climate crisis is madness.”

Scientists cannot be certain of the overall impact of climate change on severe weather like hurricanes and typhoons, but have noted that more powerful storms will continue as the climate changes. With winds of at least 140 miles an hour, Typhoon Haiyan is considered one of the strongest storms to make landfall. “As you warm the climate, you basically raise the speed limit on hurricanes,” said M.I.T. atmospheric scientist Kerry A. Emanuel.

The powerful storm surges recorded are also likely part of a new reality in major storms. “When you strip everything else away, we’re seeing a general rise in sea level,” James P. Kossin, atmospheric scientist at the National Climatic Data Center, told the Times. “There’s no question that storm surge is going to be compounded.”

Climate Change Report Causes Alarm

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New findings on climate change, establishing it as a manmade phenomenon, are garnering attention from the insurance industry, which recommends immediate action.

The Intergovernmental Panel on Climate Change’s (IPCC) newest report  “clarifies what businesses and investors already know, that climate change is happening now and human activity is the dominant reason why,” Mindy Lubber, president of CERES, a nonprofit organization that works with insurers and investors said recently on a conference call. “Climate change is disrupting all aspects of our global economy, including supply chains, commodity markets and the entire insurance industry, which is seeing exponentially large losses from extreme weather events.”

Lara Mowery, managing director, head of global property specialty practice with Guy Carpenter & Co., noted that the report should cause “significant concern” and impact how insurers and reinsurers shape their business going forward.

Insurers’ and reinsurers’ business plans “depend critically on understanding and assessing risk, which is likely to become even more challenging as weather variability increases,” she said. Identifying and understanding the causes and consequences of climate change is essential to “implementing workable risk management solutions.”

Global cat losses are increasing, she explained. In the 1980s, “the rolling 10-year annual average for the worldwide cat loss was less than $10 billion. In the last few years that average has jumped up to more than $50 billion average, based on that 10-year rolling time frame.” In addition, 2005, 2011 and 2012 represent the top three insured cat loss years on record, she noted.

Given the IPCC’s conclusion on flood, drought and changing weather patterns and evidence of this over the past 50 years, the industry needs to evaluate how these changes could impact future losses. As an example, she said, the most widespread hazard of global warming is coastal flooding. Impact of events such as Superstorm Sandy, which produced devastating storm surge, could have even worse consequences if sea levels continue to rise. “Insurers and reinsurers must continually assess the most up to date research and adjust their business plans according to increases in calculated loss.”

While this has meant more insurer capital is at risk, “that can’t be the only response, the only solution and the only answer. We can’t just keep putting more money in the path of what’s happening,” Mowery said.

She emphasized that the industry and insurance buyers can be taking steps now to address the risks.

A recent example of innovation in this area is the Metropolitan Transportation Authority’s (MTA) $200 million catastrophe bond that was issued in July, “the first of its kind to cover storm surge specifically,” she explained. The MTA commented in the aftermath of Sandy that their traditional avenues for insurance and reinsurance “constricted dramatically,” making it more difficult for them to obtain the kind of risk transfer they needed.

She also pointed out that “We can’t continue to let human and economic costs escalate. Building codes and standards and land use strategies are accepted adaptation measures to improve resilience against flood, wind and fire impacts that may worsen under global warming.”

FEMA Releases Premium Guidelines for “High-Risk” Flood Zones

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Anton Oparin / Shutterstock.com

Insurers have historically used FEMA’s Specific Rating Guidelines to calculate premiums for properties at high risk of flooding, particularly those built with the lowest floor elevation below the Base Flood Elevation (BFE). Prior to the National Flood Insurance Program’s extension in 2012 owners of these properties received subsidized rates well below the true flood risk. Many of these properties will now be rated using the Specific Rating Guidelines which FEMA released to the public last Wednesday.

The use of these new guidelines will undoubtedly result in significantly higher premium rates for many property owners in high risk zones. In its report FEMA stated that people whose properties are four feet below base flood elevation will see premiums totaling $95,000 over a 10-year period. These rates have many property owners and elected officials speaking out strongly against the reforms. Members of the Louisiana congressional delegation, including Senator Mary Landrieu (D), Rep. Bill Cassidy (R), and Rep. Cedric Richmond (D), have urged Congress to pass legislation that will delay or lower the rate increases. “I remain very concerned about the impacts these rate increases will have on homeowners and small businesses throughout our nation,” said Sen. Landrieu. Michael Hecht, president and CEO of Greater New Orleans, Inc., went every further stating that “flood insurance will be unaffordable for home and business owners across coastal and riverine America.”

In its guidelines FEMA did provide suggestions for property owners affected by the rate increases which include elevating the property above base flood level; however, this is often easier said than done. Flood insurance policies in the northeast offered an extra $30,000 to allow owners to elevate properties that had been damaged during Hurricane Sandy, but many property owners found that this amount would not cover all of the costs associated with elevating an entire property several feet above its original base. Other FEMA suggestions include adding flood vents to the property’s foundation, taking on higher deductibles, and working with local officials about community wide mitigation strategies.

The NFIP has become a major point of contention in light of the program’s fiscal crisis which was only exacerbated by Hurricane Sandy in 2012. House Financial Services Committee Chairman Jeb Hensarling (R-Texas) went as far as to vow that his committee would take up legislation to privatize the flood insurance market. The program is sure to draw more and more attention as rate increases go into effect October 1, 2013.