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8.3.4. Adaptation
Insurance losses are paid out of premiums and from surplus (net assets). The
ability to generate premiums and rebuild surpluses cannot be increased quickly
in response to changes in the incidence of losses. In a developing country context,
where insurance markets are nascent, this problem is particularly acute.
Insurers have many tools for reducing their financial vulnerability to losses
(Mooney, 1998; Berz, 1999; Bruce et al., 1999; Unnewehr, 1999; III, 2000b).
These tools include raising prices, nonrenewal of existing policies, cessation
of writing new policies, limiting maximum losses claimable, paying for the depreciated
value of damaged property instead of new-replacement value, or raising deductibles.
The additional strategies of improved pricing and better claims-handling were
reviewed in some detail in the SAR (Dlugolecki et al., 1996). Many adaptation
strategies in use or under discussion make good sense for insurers irrespective
of potential changes in the climate resulting from human activities (Sarewitz
et al., 2000) (see Box 8-1).
Insurance prices exhibit sensitivity to disaster events (Paragon Reinsurance
Risk Management Services, as cited in Klein, 1997; Edgecliffe-Johnson, 1999).
Reinsurance prices rose by approximately 250% following Hurricane Andrew (see
Section 15.2.7). Following the upsurge in catastrophe
losses in 1999, the trend once again is toward upward pressure on prices (Mooney,
2000).
Following the period of (upward) price adjustments in response to a major natural
disaster, however, insurers often enter or re-enter a battered market that offers
substantial nonactuarially based discounts, resulting in inadequate prices for
all players in the market (Matthews et al., 1999). Similar behavior has
been observed among reinsurers (Stipp, 1997). Insurers also may reduce risk
management efforts and incentives in the face of competitive pressures on prices.
Competitive pressures can cause some insurers to assume greater risk to offer
more attractive prices and products to consumers, through acquisitions of weakened
companies and destabilizing growth rates (Matthews et al., 1999).
Favorable underwriting or investment experience may generate surpluses, but
many legislatures do not permit insurers explicitly to fund pre-event catastrophe
reserves to account for anticipated changes in climate and weather. Alternatively,
insurers may try to raise more capital or reduce dividends paid to shareholders,
but such actions will not be acceptable to financial markets if the risk-to-reward
ratio is not competitive with that of other companies or sectors. The trend
toward consolidation within the insurance sector is sometimes regarded as a
factor that reduces insurer vulnerability to catastrophic losses.
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Box 8-1. Co-Benefits that Are Relevant for the Insurance
and Other Financial Services Sectors
Co-benefits are discussed elsewhere in the Third Assessment Report (TAR
WGIII Chapters 3 and 8).
Several adaptation mechanisms that are relevant to public and private
disaster risk management possess important co-benefits, but these mechanisms
are rarely accounted for in cost-effectiveness analyses. Though they normally
are associated with mitigation (e.g., emissions reductions or enhanced
carbon sinks), some also stand to enhance adaptive capacity or otherwise
benefit insurers and other parties in the financial services sector (Sarewitz
et al., 2000). Further research on this topic is merited.
- Energy End-Use Efficiency. Various co-benefits pertaining to
energy-efficient technologies have been documented (Mills and Rosenfeld,
1996; Vine et al., 1999, 2000; Changnon and Easterling, 2000;
Zwirner, 2000; TAR WGIII Chapter
5). Improved insulation and equipment efficiency can reduce the
vulnerability of structures to extreme temperature episodes and contribute
to reduced greenhouse gas emissions. Other examples include linkages
between public transit and reduced speed limits and improved highway
safety (Unnewehr, 1999; TAR WGIII Chapter
9); energy-efficient ultraviolet water disinfection to conserve
fuelwood and reduce deforestation (Gadgil et al., 1997); and
emission reductions resulting in improved air quality and reduced respiratory
disease (see Chapter 9).
- Renewable Energy and Distributed Energy Systems. Certain renewable
and distributed energy supply technologies have attributes that are
relevant to risk management and disaster recovery (Mills, 1996, 1999;
Mills and Knoepfel, 1997). For example, low-power/energy-efficient technologies
can reduce business interruption risks by extending the reliability
and operating range of backup power systems (Stauffer, 1995; Kats, 1998;
Lecomte and Gahagan, 1998; Vine et al., 1999; Deering and Thornton,
2000). Substitution of biofuels for fossil fuels can yield improved
air quality and reduced flood risk (IPCC, 2000; TAR
WGIII Chapter 9).
- Sustainable Forestry, Agriculture, and Wetlands Management. Enhancing
organic soil content benefits crop insurance as well as contributing
to improved water quality and food security. Sustainable forestry practices
yield benefits of watershed management and flood/mudflow control, which
are necessary foundations for establishing a modern economy (Scott,
1996; IFRC-RCS, 1999b; IPCC, 2000; Hamilton, 2000; see also Chapter
5). Wetlands restoration helps to protect against flooding and coastal
erosion, although methane release from wetlands also must be considered
(IPCC, 2000).
- "Green" Financial Products. Initiatives such as innovative
financing of energy-efficiency improvements, insurance products that
promote better environmental management, or insurance for adaptation/mitigation
projects under the U.N. Framework Convention on Climate Change (UNFCCC)
can simultaneously support adaptation and mitigation objectives (Hugenschmidt
and Janssen, 1999; Mills, 1999; UNEP, 1999; Zwirner, 2000). However,
considerable business risk and liability may be associated with UNFCCC
projects if measurement and verification are poor or issues of buyer/seller
liability are not addressed by insurers in the drafting of insurance
contracts
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