climate change economics

Insurance losses and climate change


In November I argued that insurance losses were the most pressing reason for the United States to start acting on climate change. Here’s a graph that illustrates that point. It’s from the World Economic Forum’s latest Global Risk Report, and it maps the most expensive natural disasters of 2011. That would include the Japanese tsunami and some major flooding in Thailand. (Since this map shows economic loss rather than human loss, the 2011 drought in East Africa doesn’t feature at all – a lesson in not measuring everything in economic terms alone)

As you can see, there is a major cluster of circles over the US. Hurricane Irene is one of them, but it was a record breaking tornado season, with a string of intense storms through April and May. These were expensive storms, costing billions of dollars. Sandy will put these in the shade, its impact estimated at $70 billion.

It’s always devastating to lose your home in a storm, but the economic cost can vary immensely in different parts of the world. In absolute terms, it’s a whole lot cheaper to rebuild a village of grass huts or tin houses than it is to rebuild a storm-wrecked American suburb. As a drive through parts of New Orleans can illustrate, it might not be economically viable to rebuild at all in some cases. This is the challenge that the US faces in a world where natural disasters are becoming more frequent. If these trends continue as climate change worsens, insurance losses are going to become a major drag on the rest of the economy.

Lord Stern investigated these costs in his review of the economics of climate change. “Based on simple extrapolations,” he wrote in 2008, “costs of extreme weather alone could reach 0.5 – 1% of world GDP per annum by the middle of the century, and will keep rising if the world continues to warm.” He also points out some of the other effects of climate change on insurance. Once the insurance companies start to feel the squeeze, they will put up their premiums and everybody will have to pay more – this is going to be a routine cost to ordinary people, not just big expenditures after a disaster. They may just refuse to insure people in high risk areas, leaving the government to cover them instead (See the current industry squabble over flood insurance in Britain). There’s also the risk of financial instability if a major disaster pushes a big insurance company too far into the red, and the Citigroup and AIG bailouts show how that can ricochet around the markets in unexpected ways.

The media, the politicians and the general public have filed climate change as an environmental issue, but it’s not. It’s bigger than that. It’s a social and economic problem too. The warnings from the environmental movement continue to go unheard, but the insurance industry may prove harder to ignore.


  1. You will have a hard time convincing many people that climate change is real. There just is a disconnect from Joe Public that says he has no ability to positively or negatively affect such a massive problem. He will kick the can to his local or national elected representatives, who will rage about it until the next gun tragedy, or war, or political mess distracts them.

  2. I think it is crazy for the government (us) to insure people who continually re-build in flood planes. It’s nice to have a home on the shore or along the river but why should my money go to rebuilding homes that have probably been destroyed atleast once before?
    I think the government should have a policy like this. Initially they will cover 100% of the covered cost. After that they cover 75%, if you get hit again they cover 50%, then 25% and then you are on your own.

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