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  Geotimes - August 2007 - Climate change will cost us

Science and society
Climate change will cost us

Climate change will inflict additional costs to the economy in the coming decades, according to a new report by the U.S. Government Accountability Office (GAO). Dealing with the effects of climate change will cost both citizens and businesses, especially insurance companies, but will cost the U.S. government even more — and before its emergency coffers are bankrupted, the government needs to take action, the report says.

The U.S. government acts as the insurer of last resort. Various government programs, such as flood insurance, pay out when the weather damages personal property beyond what is covered by private insurance. From 1980 through 2005, private and federal insurers together paid more than $320 billion in claims from weather-related losses, according to the GAO report, released May 3. Such losses vary from drought-related crop losses to storm-related floods to hurricane-related damages. Whatever the cause, the government has paid out record amounts in recent years and those numbers are increasing, especially as more people move into hazard-prone areas, the report says. Furthermore, “rising temperatures are expected to increase the frequency and severity of damaging weather-related events, such as flooding or drought,” the report says. Private and federal insurers will both bear the costs of climate change-related damages over the coming decades.

Unlike private insurers, the U.S. government does not have the funding to support such increases in insurance expenses, says Richard Murnane, program manager for the Risk Prediction Initiative and a senior research scientist at the Bermuda Institute of Ocean Sciences. “They’re setting themselves up for enormous problems,” he says. The government “needs to decide whether it wants to operate in a self-sufficient manner and charge adequate premium for its exposure, or whether it wants to operate in a reactionary manner and appropriate the additional funds required to pay for losses as they occur,” he says.

“It’s really the unusual events, the low-probability, high-impact events, that drive the costs,” says Gregory van der Vink, a geologist at Princeton University in Princeton, N.J. Thus, he says, the question the government and private insurers need to ask is “how do you amortize the low-probability, high-impact event?” In 2004 and 2005, record numbers of hurricanes struck the United States, in record strengths. In 2006, despite contrary predictions, none struck the mainland. The combined impacts of shifting climactic zones, sea-level rise and development means that there will be more variability in recurrence intervals of low-probability, high-impact events, so the usefulness of past experience for projecting future losses is limited, van der Vink says. “We need improved, open modeling that will maintain public awareness and help insurance companies prepare” for these events. Although “rare for any specific town or city, when integrated across a nation for which large insurance companies and the federal government have responsibility, [low-probability, high-impact] events occur regularly and dominate the costs,” he says.

It’s important that the government and private insurers examine climate’s effect on their costs, and thus the costs to consumers, van der Vink says, but unless people stop moving into hazard-prone environments, costs are only going to increase. And stopping developments in highly vulnerable areas is something that no one has come to terms with yet, he adds.

Meanwhile, per the GAO recommendations, the departments of Agriculture and Homeland Security (which oversees the Federal Emergency Management Agency) will be further analyzing the long-term fiscal implications of climate change on the government’s insurance programs.

Megan Sever

"Science, Catastrophe Risk Models and Insurance," Geotimes, February 2007
"The Increasing Costs of U.S. Natural Disasters," Geotimes, November 2005

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