Mutually Insured Destruction

Published on September 1, 2013 12:37 by Water Network Research, Official research team of The Water Network in Business

In March 1947, a winter of heavy snowfall followed by a quick thaw and torrents of rain swelled rivers throughout England and Wales. Over the course of just 13 days, at least 27,000 homes and businesses were flooded. It was one of the worst natural disasters in British history. But thanks to climate change, which can prevent the thick snowpack from which spring floods draw their strength, that sort of flood may be less likely to happen today.

The seemingly inexorable (and increasingly irreversible) march of planetary warming is something we tend to associate with increased devastation — floods and famine, droughts and storms. In many cases, that's true. But there's a reason scientists prefer the term "climate change" to "global warming" — not everything is getting warmer. As the global average temperature rises, it alters weather systems, changing patterns of heat and cold and shifting wind currents. Risk is redistributed along with them.

No one understands risk better than the insurance industry — except, perhaps, the reinsurance industry, the companies that sell insurance to insurers, which also need protection from risk exposure. As the risk managers for the risk managers, reinsurers follow climate change obsessively. A great deal of money is at stake. If the 1947 spring floods happened today, they could cost the insurance industry as much as $24 billion.

In June of this year, the Geneva Association, an insurance research group, released a report called "Warming of the Oceans and Implications for the (Re)insurance Industry." It laid out evidence explaining how rising ocean temperatures are changing climate patterns and called for a "paradigm shift" in the way the insurance industry calculates risk. Traditionally, insurers have predicted the future by studying the past. If your house is on a 100-year flood plain, for example, that's because an actuary looked at historical data and calculated that there's a 1 percent chance of your neighborhood's experiencing a flood of a certain magnitude every year. Over the course of 100 years, that massive flood is likely to happen about once.

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