Each time the UN Intergovernmental Panel on Climate Change (IPCC) comes out with a scientific assessment of climate change, its findings are more certain and alarming. In November, the IPCC published the final version of its Fourth Assessment Report, which said that warming global temperatures will bring, for example, more frequent heat waves, longer droughts, and more intense storms.

While certainly troubling, these trends come as no surprise to insurance and reinsurance companies that have been tracking the rising costs of natural disasters for decades. According to "Hedging Climate Change," a report recently published by Allianz SE, the number of natural catastrophes has been on the rise since the 1970s. The vast majority of these have been weather related, suggesting a connection with climate change.

"Allianz has analyzed the trends in the number of natural catastrophes and the resulting insured losses," says Allianz SE board member Clement B. Booth. After other trends, such as urbanization and coastal and floodplain development, were also considered, annual insured damages are projected to rise by 41 billion US dollars per annum during 2010 to 2019.

One of the report’s central questions is how and under which conditions the rising number of catastrophes related to climate change will be insurable. Booth says the key is adaptation and innovation.

"Allianz is taking a leadership position on the issue of climate change on a range of levels," says Booth. "In relation to the issues raised by Allianz’s 'Hedging Climate Change' report, we will continue to look for new and innovative approaches to the challenge of risk diversification in the face of increasing levels of damage from weather-related natural catastrophes.

"According to the report, one way to improve the insurability of catastrophes is to develop risk partnerships between private insurers and governments. A few examples of insurer-government risk partnerships already exist, such as flood coverage in the UK or government reinsurance schemes in Australia.

Another way to expand insurability is to diversify risk in the capital markets. So far, Allianz has launched two catastrophe bond (cat bond) programs, one to transfer the risks of severe floods in Britain and earthquakes in most parts of North America, and the other to transfer risks of windstorms in seven European countries.

Cat bonds have proven popular among investors. The volume of bond issuances in 2007 has about tripled compared to 2005. According to Jay Ralph, the CEO of the reinsurance division of Allianz SE, cat bonds "offer protection for catastrophe risk and provide access to non-traditional retrocession capacity on a multi-year basis and with minimal credit exposure."

Allianz sponsored 200 million euros of windstorm cat bonds in November, while the flood and earthquake bond has raised around 150 million dollars (more than 100 million euros). The programs have a maximum size of one billion euros and dollars respectively, but Ralph has said neither program needs to reach this scale to be considered a success.

If these approaches can help sustain and expand insurability in an increasingly stormy world, then Clem Booth says Allianz is on the right track. "Allianz's objective is to maintain and even extend the scope of insurance coverage against natural catastrophes so we can continue to provide comprehensive insurance solutions to our customers."

A large share of catastrophe risks remain uninsured. In the biggest individual case of financial loss to date, Hurricane Katrina caused 144 billion dollars in total losses in the southern United States, only 49 billion of which were insured.

The rift between total losses and insured losses, however, is greatest in developing countries, where insurance markets are still rudimentary. The floods that struck China in 1996, for example, caused around 24 billion dollars in damages, of which less than 500 million were covered by insurance.

The developing world is also where the impacts of climate change – floods, droughts, and massive storms – are felt the most. According to Munich Re statistics, Asia was hit by the most natural disasters (4500) during 1980 to 2005, which together killed over 800,000 people. Although these disasters also included non-weather catastrophes like earthquakes, most damages and fatalities were caused by storms and flooding.


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