Central Bankers Demand Insurers Assess Climate Risks Despite Lull In Extreme Weather
The Bank of England is demanding about 30 insurance companies assess the risks that global warming poses to their balance sheets, despite reports of a lull in natural disasters and healthy profit margins in the industry.
The Financial Times originally reported on Monday that England’s central bank is concerned that more frequent and stronger natural disasters due to global warming could leave insurance companies strapped for cash. The central bank has asked insurers to examine what global warming could mean for their bottom lines.
The questioning is part of the U.K. Department of Environment’s climate assessment. The bureaucracy asked central bankers to see if the nearly $3 trillion U.K. insurance industry is ready to face the impacts of global warming.
The rash of floods and rain the country experienced last winter have politicians and some scientists worried that insurance companies may not be ready to pay out large sums of money to disaster victims and stay in the black.
While the U.K. flooding was certainly a dramatic event, there is little evidence that global warming is causing natural disasters to become more frequent or intense. In fact, the insurance market Lloyd’s of London reported in September that its profits were being boosted by a lack of natural disasters this year.
Reuters reported that “Lloyd’s combined ratio, a measure of profitability showing how much insurance premium is paid out in claims and expenses, deteriorated to 88.2 percent from 86.9 percent.” A combined ratio under 100 percent means profit for an insurer.
“It’s been a fairly benign period for major catastrophes,” Lloyd’s acting finance director, John Parry, told Reuters.
Indeed, the International Federation of Red Cross and Red Crescent Societies reported that 2013 saw the lowest number of natural disasters in a decade, with floods and storms being the most common disasters. Deaths from natural disasters stood at 22,452 last year– nearly 80 percent below the decadal average of 97,954 deaths.
The reinsurance company Munich Re found that global economic losses from natural disasters in the first half of 2014 were only $42 billion and insured losses were only $17 billion, which was “considerably below the average for the past 10 years (US$ 95bn and US$ 25bn respectively).”
“The mild winter in Europe contributed to the heavy floods in England that lasted into February,” Munich Re reported. “As it was mainly rural areas that were affected, overall losses remained within an acceptable limit of US$ 1.3bn (€960m) and insured losses were around US$ 1.1bn (€800m).”
“The tornado season in the U.S.A., which peaks from May to July, has been below average so far,” Munich Re reported. “The U.S. weather agency NOAA recorded 721 tornadoes until end of June, in comparison to an average of 1,026 in the years 2005–2013. However, some tornado outbreaks caused significant damage.”
Despite the optimistic report, Munich Re warned that such low levels of natural disaster losses may not last if global warming continues to be a problem. The company also warned that an El Niño event late in the year could lead to powerful storms in the northwest Pacific– but they are less likely to make landfall.
U.S. billionaire Warren Buffett made headlines earlier this year when he dispelled the notion that global warming was causing weather to become more extreme. Buffett said that insurance companies he owns have not seen an uptick in extreme weather. And they would know since they have to pay out huge sums of money in the wake of major disasters.
“I think that the public has the impression that because there has been so much talk about climate, that events of the last 10 years, from an insured standpoint on climate, have been unusual,” Buffett told CNBC’s “Squawk Box.” “The answer is, they haven’t.”
“You read about these events, but you read about events 30, or 40 or 50 years ago,” he added.
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