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Derrick Z. Jackson

Bad weather policy: Insuring against climate change

For insurance companies, climate change is not only real; it’s really expensive. Will Washington notice?

david badders for the boston globe

ENVIRONMENTALISTS ARE not the only ones who worry as projections about climate change keep getting worse and worse. So do insurance companies, which feel the effects financially as the pace of climate-related disasters accelerates. It is telling that, even as some business groups oppose climate-change legislation in Washington, many of the companies with the most to lose from global warming are treating it as a reality - and pricing their products accordingly.

Losses from extreme weather related to climate change are no longer chump change. Allstate CEO Tom Wilson this year told investors that catastrophic weather losses beyond hurricanes and earthquakes had risen four-fold over the last three years, to $2 billion. Premiums for homeowners were rising 7 percent this year, Wilson said, noting that a big driver is roof damage from hail and wind.

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“If you had asked me did I think we could have a $355 million hailstorm in Arizona [in 2010], I wouldn’t have thought that hail could be that bad in Arizona,’’ Wilson said in one meeting. Wilson said pricing premiums to account for increased extreme weather events “is permanent.’’

Other insurers are seeing the same patterns. German insurance giant Munich Re estimated that in the first half of 2011, the world suffered a record $265 billion economic loss from severe natural catastrophes. Most of the economic losses came with the earthquakes in Japan and New Zealand, but the biggest weather-related economic losses were still enormous — the $15 billion in the United States from the tornadoes and severe thunderstorms that swept across the Midwest and the South.

Even weather changes that unfold more gradually than hurricanes and tornadoes have high costs. The global insurer Swiss Re found that damage to buildings from sinking soil induced by drought now costs France alone $450 million a year. David Friedberg, CEO of the Climate Corporation, a San Francisco-based company which insures farmers for extreme weather events, argues that the most persistent problems are either too much rainfall or too little rainfall. “What seem like minor deviations in rain and heat to the average person,’’ he says, “are millions in crop damage to soybean farmers in Indiana. We’re having worst-ever floods in North Dakota, worst-ever droughts in Texas. Higher probability of those events means higher premiums and higher prices for food. At some point, it may become unsustainable.’’

Perhaps those who aren’t yet concerned about climate change will be persuaded by hail on their roofs or cracks in the very foundations of their homes. “Unfortunately, a year like 2011 does our work for us,’’ said Sharlene Leurig, insurance analyst for Ceres, the Boston-based nonprofit that promotes corporate responsibility on climate change. “Insurers think it is a crisis unfolding. Real estate experts are starting to recalculate the value of real estate in areas of frequent extreme weather. We’re getting to the point where climate destabilization is really beginning to destabilize the real lives of people.’’

The destabilization is clearly increasing. The United Nations Intergovernmental Panel on Climate Change this month issued a new report saying that the frequency and magnitude of warm daily temperature extremes are “virtually certain’’ to increase this century. But it is possible that higher bills from insurers will change minds in Washington more effectively than a preponderance of scientific evidence has.

MIT tropical cyclone researcher Kerry Emanuel said if insurers are catching on to the damage of climate change and charging homeowners for it, that perhaps homeowners might get ahead of the politicians. “Right now,’’ Emanuel said, “there is such a huge gap between science and policy, most people in my field have gotten pessimistic the United States will do anything.’’

That pessimism might change if more companies follow Allstate’s lead by factoring climate change into their prices. The more homeowners who take notice and demand action in Washington, the better the chance that — to borrow Allstate’s slogan — we’ll all be in good hands.

Derrick Z. Jackson can be reached at jackson@globe.com.
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