Climate change's soaring costs

Although they are given harmless names such as Katrina, Sandy, or "El Niño" (Spanish for “the child”), extreme weather events cause human suffering, and have devastating economic consequences.

Almost 1.5 million people have fallen prey to increasingly unpredictable weather extremes. Sixty percent of those who lost their lives as a result of storms, floods or drought, lived in the poorest regions of the world and had virtually nothing else to lose. When it comes to property damage, however, it is the industrialized world that bears the brunt.

Climate change has led to an increase in severe weather such as storms, floods and extreme temperatures, and the human and economic consequences are becoming increasingly serious as a result. Population growth, complex urban infrastructures and greater wealth in industrialized countries are feeding the trend, as they signify larger numbers of potential victims and even greater damage.

According to the world’s largest reinsurance company Munich Re, extreme weather has caused damages to the tune of $2.6 billion (1.97 billion euros) between 1980 and 2011. More than half that figure was a result of storms, almost a third were so-called hydrologic events, which include flooding, and 17 percent of damages were the result of drought and heat.

All such damages are coverable by insurance companies, but the steadily increasing flow of payments they're having to make has cast their business model in doubt. Reinsurers, in particular, are therefore beginning to think outside the box, working with scientific institutes to explore the causes.

Data on climate change

Munich Re has been running its own department to research risks related to natural events since the 1970’s. The information is stored in a database containing 30,000 entries, which the company claims to be the largest collection of its kind anywhere in the world.

Peter Höppe, head of the Geo Risks Research department at Munich Re, says that although it began as a hunch, there is now growing evidence that climate change has caused a sharp increase in the number of damages claims: the number of weather-related natural disasters has tripled in the past three decades. “That indicates that something in the atmosphere has changed,” he says.

Cooperation with climate researchers

Peter Höppe receives support from the Potsdam Institute for Climate Impact Research (PIK), which has worked closely with Munich Re for many years. PIK delivers information about global climate changes and the possible effects on people, nature and science.

“Predictions are not possible,” says PIK climate researcher Friedrich-Wilhelm Gerstengarbe, adding that they can, however, provide model scenarios which insurance companies can use to evaluate their business model.

"We look at the risk involved when insuring a house next to a river,” Gerstengarbe says.

They study the overall picture, rather than individual storms, to evaluate whether climate change is really at play. It is challenging work, but the scientist says the results allow them to minimize the fallout.

A good example is South Africa. The Orange River, one of the most important in the country, has been tapped to its capacity. “If climate change there reduces the water level further, we have a massive problem,” Gerstengarbe says.

The PIK therefore looked into rain pattern developments, thereby providing local people with enough data to make an informed decision on how best to use or conserve their water.

Internet database

The PIK is also currently working on constructing an Internet platform to provide information about climate change and its consequences. Klimafolgenonline.com will initially offer information on weather patterns for different areas in Germany; information that farmers and the government can use as a basis for decision-making. Ultimately, however, the institute plans to expand the platform to make it available worldwide.

Insurance companies have a vested interest in seeing a reduction in the effects of climate change. Munich Re therefore supports such initiatives as a storm simulator from the Institute for Business and Home Safetey (IBHS).

The insurance institute’s wind tunnel enables researchers to see how model buildings stand up to severe weather conditions. Information gleaned can then be factored into construction work.

The reinsurer is also keen to have a say in flood prevention matters, and is on several committees. What’s more, in April 2005 Munich Re founded the Munich Climate Insurance Initiative (MCII, see infobox), which focuses on those who are generally too poor to take out insurance policies, but whose very existence is threatened by serious weather events.

Insurance for the uninsured

The initiative aims to offer farmers or fishermen in emerging and developing countries the opportunity to take out microinsurance policies as a means of protecting themselves from weather-triggered financial disaster. The policies can be financed by contributions from industrial nations, which ultimately play a decisive role in causing climate change.

With support from the German environment ministry, the MCII is developing an insurance concept in the hurricane-beleaguered Caribbean. The aim is to protect small-scale farmers and day-laborers from losing their means of existence.

In the Philippines, which often falls prey to torrential rain and storms, Munich Re is also working with the German aid agency GIZ and a local insurance company to introduce so-called weather index microinsurance.

“Small payments are enough to buy the seeds that keep people going,” Peter Höppe says.