United States Environmental
                   Protection Agency
              Office of Air and Radiation
                July 2000 (Web Version)
                    Preparing   for  Global  Warming
                   SMART  INSURANCE
       Why should the insurance com-
       munity—insurance agents and
       brokers, primary insurers, risk
managers, and reinsurers—put a pre-
mium on addressing global warming?

Consider the following:
•  Most climate scientists believe that
   human activities are contributing to
   long-term warming of the planet.
•  Although uncertainties remain,
   some climate models suggest that
   extreme weather events such as
   wind storms, heavy precipitation,
   and consequent flooding  may
   become more frequent and severe in
   a warmer world, making  it harder
   to predict losses.
•  Inflation-adjusted losses to insur-
   ance companies from extreme
   weather have increased significantly
   in recent years.
•  Many steps that individuals and
   institutions can take to reduce emis-
   sions of heat-trapping gases have
   the added benefits of saving money
   and making communities safer and
   healthier places to live.

The insurance industry has an oppor-
tunity to reduce risk and promote safe-
ty by informing policyholders about
global climate change. Preparing for
the potential effects of global warming
can save lives and money

In  1998 weather-related natural disas-
ters produced significant human and
economic losses. According to a
Worldwatch Institute estimate,  in the
first 11 months of the year, storms,
floods, droughts, and drought-
related fires caused $92 billion
in economic losses worldwide.
They caused at least 41,000
deaths and displaced some 300
million people, more than the
entire population of the United
States. During the first three
quarters of 1998, the U.S.
insurance industry alone had
weather-related claims of more
than $8 billion—three times
the claims of 1997.

Although the losses are stag-
gering, they are no longer
unusual. According to the
Reinsurance Association of
America, nearly 50 percent of
the insured  losses from natural
catastrophes during the past 40
years have been incurred since
1990. Data from the insurance
rating company A.M. Best Co.
indicate that global warming
could cause catastrophes that
would cost insurers $100 bil-
lion, reportedly equal to the
total value of the capital and
surpluses of the world's top 25 global
reinsurers. According to the interna-
tional reinsurer Munich Re, "continued
climate change will almost  inevitably
yield increasingly extreme natural
events and large catastrophic losses.
This may make some vulnerable
regions uninsurable."

Despite these trends, considerable
debate remains about the economic
threat that insurers face from the
impacts of climate change, given the
industry's overall financial strength,
    Economic Losses from
   Weather-Related Natural
Disasters Worldwide, 1980-98
   Put a Premium On PREVENTION
        diversity and adaptability. Some of the
        increases in losses are due in part to
        behavioral factors such as population
        movements toward high-risk areas and
        poor environmental management prac-
        tices that exacerbate the impacts of
        droughts, flooding, and other severe
        weather events.

        The risk of rising costs to insured prop-
        erty from flood damage is primarily a
        federal concern. FEMA's National Flood
        Insurance Program provides coverage
        to individuals in participating commu-
        nities for commercial and residential
                                               page one

buildings and their contents. The rising
insured costs attributed to flood dam-
age are reflected in the programs
indebtedness to the U.S. Treasury of
approximately $720 million as of
December 1999.

Since its inception, FEMA has promoted
mitigation actions to reduce future risks
from flood damage. FEMAs Flood
Mitigation Assistance and Hazard
Mitigation Grant Program funds buyouts
of homes and lots that are repeatedly
flooded. From 1998 through April 21,
1999, FEMA had purchased 21,753
homes at a cost of $533 million.

Although flood insurance for buildings
is a federal program, private insurers
face other risks from floods, such as
the costs of disruptions to businesses.
Approximately 20 percent of insured
     I There were three times as many natural catastrophes
      in the 1990s as there were three decades ago.

     I Insured losses from natural disasters are 15 times
      higher today than they were in the  1960s, even
      after adjusting for inflation.

     I The total dollars paid out in natural disaster-related
      claims since 1990 is 50 percent greater than the loss-
      es incurred over the past 40 years combined.

     I People are moving to coastal areas at unprecedented
      rates, substantially increasing property values in
      high-risk areas.
economic losses from Hurricane
Andrew were related to business inter-
ruption. Another risk is flood damage
to automobiles, which is covered under
the comprehensive sections of standard
auto insurance policies. The risk of ris-
ing health insurance costs for victims
of floods is still another risk borne by
the private insurance industry. All of
these risks could increase with a rise in
the frequency and severity of storms
and floods.

A number of insurance companies have
concluded that the risks associated with
global warming are serious enough to
warrant precautionary action.

One severe storm, hurricane, or heat
wave is not evidence of climate change.
Weather is naturally variable, and we
           can expect unusual condi-
           tions to occur from time to
           time. Still, current evidence
           suggests that global warm-
           ing may make extreme
           weather events more fre-
           quent and possibly more
           The term global warming is
           used to describe a climate
           change that involves a grad-
           ual increase in the Earths
           average temperature.
           Measurements indicate that
           global temperatures have
           increased by about 1 degree
           Fahrenheit over the past cen-
           tury. Moreover, according to
           the World Meteorological
           Organization,  1998 was the
           20th consecutive year with an
           above-normal global surface
           temperature. The 10
           warmest years since  record-
           keeping began all have
           occurred since 1983, with
           seven of them since  1990.

           The warming began hap-
           pening during a period
           when human activities—
           especially burning fossil
           fuels such as oil, coal,  and
           natural gas to power cars.
factories, utilities, and appliances—
were beginning to increase the concen-
trations of carbon dioxide (CO,) and
other heat-trapping gases in  the atmos-
phere.  Gases such as carbon dioxide
and methane intensify a natural phe-
nomenon known as the "greenhouse

Although most scientists believe that a
rise in  the concentration of C02 and
other greenhouse gases in the atmos-
phere will lead to additional global
warming, uncertainties remain about
its timing and severity.  Nevertheless.
many are convinced that human activi-
ties have contributed to the long-term
warming of the past century and lead
to pronounced climatic changes.

Most current scientific research sug-
gests that global warming  may have
serious impacts.  These include
increased human mortality from storm
events, extinction of some animal and
plant species, a rise in sea levels, and
an increase in extreme weather events.

Although these impacts ultimately  will
touch every segment of the business sec-
tor, the insurance community is espe-
cially at risk from rising sea levels and
more frequent and severe storm events.

Water expands as it heats, so as the
oceans have warmed over the past cen-
tury, sea levels worldwide  have risen
4 to  10 inches. An additional rise  of as
much as 20 inches is expected during
the 21st century.  Studies by the U.S.
Environmental Protection  Agency and
others  have estimated that along the
Gulf and Atlantic coasts, a 1-foot  rise
in sea level is likely by  2050 and could
occur as soon as 2025. As the sea rises.
it erodes beaches, increases storm
surges, leads to a loss of property,  and
can destroy wetlands and compromise
water supplies.

About  one-half of the U.S. population
resides within 50 miles of the coast.
According to the American Insurance
Association, the  number of people who
live in  the hurricane-prone coastal
                                                       page two

"By protecting environmental resources,
  you're also ensuring the  economic  integrity of
  coastal  communities/7
James F. O'Connell, Coastal and Marine Resources Specialist
areas that stretch from Texas to Maine
will rise from 45 million people in
1960 to 73 million by 2010. The
Institute for Business and Home Safety
reports that in 1993, the dollar value of
residential and commercial structures
in a 50-mile-wide band along the
Atlantic and Gulf coasts was $3.15 tril-
lion—a 69  percent increase over 1988.
As a result of these trends, property
damage from beach erosion, storm
surges, and extreme weather could
become very costly to insurers.

Warmer, drier weather in parts of the
United States also could exacerbate the
risk of wildfires. Population increases in
areas where wildlands meet urban devel-
opment has put more people and proper-
ty susceptible to damage from wildfires.
The Federal Wildland Policy states, "The
wildfire hazard has become a major fire
problem that will escalate as the nation
moves into the twenty-first century... It is
clear from recent episodes that losses will
increase in the future."

Extreme weather in the 1990s already
has taken a significant toll on some
insurance companies. For example, the
insured damage from Hurricane
Andrew totaled approximately $16 bil-
lion, pushing seven insurance compa-
nies into  insolvency and prompting
others to reduce their exposure or leave
the market altogether. In 1991, the
Oakland/Berkeley wildfire caused more
than $1.7 billion in insured losses.
Recently, in North Carolina, flooding
from Hurricane Floyd resulted in enor-
mous economic costs from damage to
wastewater treatment plants, dead live-
stock, polluted drinking water,  and
business disruption.

In terms of other risks, some research
indicates that global warming may
increase hurricane activity, but  other
studies suggest that global warming
actually could suppress their formation.
Regardless, there is no disagreement
that population trends have put more
lives and property at risk in hurricane-
prone areas and that hazard mitigation
activities that reduce property loss, lost
lives, and infrastructure damage are
prudent for their own sake.

Another weather-related phenomenon
that can cause devastation is El Nino, a
naturally occurring warm ocean current
that can change weather patterns
around the world. El Nino  cycles have
been observed for hundreds of years.
but the 1997-1998 El Nino was the
strongest on record. It was  marked by a
number of unusually severe regional
weather occurrences,  including an ice
storm in New England, a Texas heat
wave, Florida wildfires spurred by
drought, and Hurricane Mitch. From
March 1997 to June 1998,  El Nino
caused total losses of  nearly $14 billion
and insured losses of approximately
$2 billion. Studies at the National
Center for Atmospheric Research sug-
gest that global warming may  accentu-
ate El Nino's impacts  by intensifying
the strength and duration of the
El Nino cycle.

Climate change may have additional
impacts that could prove harmful to
the health insurance community. As
temperatures warm, for example, heat-
related mortality is expected to rise.
Respiratory and cardiovascular diseases
could increase due to higher levels of
air pollution and the incidence of
infection could increase. These impacts
could lead to increases in medical costs
and illness-related losses to businesses.
Insurance companies can take a number
of actions to reduce the risks from cli-
mate change. Most of the following steps
will not only lower risk but also will save
money for individuals and  companies.

Learn about climate  change: First and
most important, insurers should educate
themselves about the latest climate
change science, the risks that global
warming may pose to the industry and
insurance customers, and the  steps that
can be taken to reduce the risks and
lessen the impacts of climate change.
Learning more about global warming
will help insurers make informed deci-
sions, take responsible actions, and con-
duct practical  outreach to customers.
community leaders, and the public.

Lead by example: A number of insurers,
including Swiss Re and Norway's Store-
brand, have published statements con-
cerning environmental issues.  General
Accident (now Commercial General
Union) published a statement  that
asserts: "As a successful commercial busi-
ness, we consider minimizing  resource
use, energy use, and waste  production to
be integral to good business practice."

In addition, many companies have ini-
tiated efforts to manage energy use in
their own facilities. Swiss Re.
Storebrand, and other insurers have
adopted environmental  criteria for pur-
chasing office products and equipment.
The voluntary ENERGY STAR® and
Rebuild America programs offered by
the U.S.  Environmental Protection
Agency and U.S. Department of Energy
are available to facility managers seek-
ing technical assistance  in this area.

Mobilize disaster preparedness tech-
nology and planning: Many  of the
losses sustained during natural disasters
stem from inadequate building codes or
poor compliance. The Institute for
Business and Home Safety offers  special
     "What Can the Insurance Community Do?" adapted from "The Coming Storm: Global Warming and
     Risk Management" by Evan Mills. Risk Management magazine. May 1998.
                                                     page ihree

     • Listen and respond to the concerns of those in the insurance and risk communities.
     • Bring together interested stakeholders to explore adaptation and mitigation options.
     • Support climate change research.
     • Invest in research and development to promote technologies that reduce green-house gas
       emissions, save energy, and lessen our dependence on foreign oil.
     • Emphasize solutions based on flexible, market-based policies.
     • Support a balanced, strong, and effective international climate change agreement that includes
       binding emissions targets, flexible implementation mechanisms, and the meaningful, equitable
       participation of all nations.
training for code officials and works
with the Insurance Services Office—a
supplier of statistical, actuarial, under-
writing, and claims information for the
property/casualty insurance industry—
to implement a community-level code
rating system. Insurance purchasers in
communities that prepare for natural
disasters through effective building
codes receive discounts on their proper-
ty insurance. Similar ratings programs
exist for community fire protection and
floodplain management. In another
example of fostering disaster prepared-
ness, U.S. insurer FM Global  issues cat-
astrophe warnings containing last-
minute  tips on property preparation via
fax and e-mail to customers in areas
threatened by a natural catastrophe.

Support climate monitoring and
research: An increasing number of
insurers are hiring staff climatologists
to study weather phenomena as a part
of their overall risk modeling. Many
companies support international cli-
mate research to better understand and
predict  severe weather events, as  well
as examine potential risks from global
warming.  Since strategies to mitigate
climate  change through reducing emis-
sions of heat-trapping gases have addi-
tional benefits to insurers and their
customers, research on the risks can
occur concurrently with activities to
reduce the threat of global warming.

Capitalize on energy efficiency and
renewable energy: Energy consump-
tion is the largest contributor to
human-induced greenhouse gas emis-
sions. Fortunately, energy-efficient and
renewable energy technologies help
mitigate insurance risks. Energy-
efficient refrigeration equipment,
for example, minimizes the likelihood
of food or pharmaceutical spoilage fol-
lowing power outages. Solar energy
systems can help maintain lighting sys-
tems following natural disasters.
Insurers can encourage their customers
to implement such technologies.

Consider green investments:
Some insurers may opt to invest in
ventures that reduce climate  change
risk. One private  company has
launched mutual  funds that invest in
companies that practice sound envi-
ronmental management.

Insurers worldwide are taking impor-
tant steps to address the impacts of cli-
mate change  on the insurance and risk
community. In July 1997, the United
Nations Environment Programme cre-
ated an association called the Insurance
Industry Initiative for the Environment
to promote a Statement of Environ-
mental Commitment and
coordinate working groups on
topics of interest to the insur-
ance sector.
The Statement of Environ-
mental Commitment empha-
sizes the importance of a
strong, proactive insurance
industry as an "important con-
tributor to sustainable devel-
opment, through its interac-
tion with other economic sec-
tors and consumers."

In December 1997, more
than 200 top-level insurance
executives and representatives
of other financial institutions
from 10  countries met in
Tokyo to share experiences
        and strategies for the implementation
        of environmental commitments in the
        insurance sector.

        Taking steps aimed at reducing the
        risks from natural disasters is one of
        the primary objectives of the Institute
        for Business and Home Safety. The
        institute recognizes that much of the
        devastation caused by natural disasters
        can be alleviated through increased
        public awareness.  To this end, IBHS
        engages in public  outreach and encour-
        ages policies that promote safety from
        natural disasters.

        In December  1998, Rhode Island
        became the first state to participate in
        the institute's Showcase State Program,
        in which IBHS helps states reduce their
        vulnerability to natural disasters. The
        governor signed an executive order ini-
        tiating Rhode Island's participation in
        the program.

        The Showcase State Program estab-
        lished a public-private partnership that
        develops safety strategies to help com-
        munities reduce deaths, injuries, prop-
        erty damage, and  economic losses
        caused by natural disasters. The strate-
        gies include a statewide hazard analysis
        and risk assessment,  as well as pro-
        grams to increase  public awareness
        about what can be done to protect
        homes and businesses.
The Institute for Business and Home Safety works to
minimize the impacts of natural disasters by engag-
ing in public outreach and encouraging policies that
promote safety.
    Tel: 617-292-2003
    Website: http://www.ibhs.org/
EP/& global warming website provides in-depth infor-
mation on climate change and includes links rele-
vant to the business and insurance communities.
    Website: http://www.epa.gov/globalwarming/
    For more specific insurance information:
    http ://www. epa. go v/globalwarming/
                                                         page four