Unlikely partners team up on global warming

Washington Insurance Commissioner Mike Kreidler and his Nebraska counterpart, Tim Wagner, will chair a new task force to study the potential implications of global warming on the industry.

The pairing, to say the least, looks unlikely. Nebraska occupies the high and dry geographic center of the United States; Washington — its western half anyway — its soggy coastline. Wagner’s a red state Republican, Kreidler a deep blue Democrat. If there was a major natural catastrophe in either state recently, it sure did not make the headlines. In fact, Spokane and several other Northwest cities have been ranked among the nation’s 10 safest in terms of natural disasters. Omaha ranked 14th.

And for many the whole idea of global warming remains a climatological Frankenstein from the laboratory of bad science. If it’s warmer — and there’s less dispute on that point — than the change simply represents a fluctuation characteristic of global weather since dinosaurs grazed in Canada.

Fluctuation or a fundamental change, however, the near-term property damage is the same, with the Gulf Coast hurricanes being Exhibit A. Swiss Re, one of the world’s largest insurance companies, estimates natural disasters of all kinds caused $230 billion in damage globally in 2005. Katrina alone accounted for slightly more than half that amount. Those losses dwarf those from man-made disasters. Events like terrorist attacks destroyed only $10 billion in property.

As recently as 2004, Swiss Re warned the economic losses from natural disasters would double to $150 billion in 10 years. Funny, huh? But the difficulty of projecting how much damage hurricanes, tornadoes or other weather mischief might do in any one year keeps actuaries up at night. And if the industry miscalculates, the cost of its errors can fall on taxpayers.

The potential risks were brought home to Nebraska by drought and hail. Wagner says old-timers have compared conditions in recent years to those of the Dust Bowl era. “Something’s going on,” he says.

In Washington, drought has severely hurt hydropower generation. Devastating fires have swept through tens of thousands of acres of forest and grassland.

Kreidler and Wagner teamed up under the aegis of the National Association of Insurance Commissioners. Wagner had arranged for a September symposium on the implications of climate change, but the event had to be cancelled. The venue was in New Orleans. When it was finally held in December, Wagner says attendees were spellbound by reports from leading consultants and insurance industry representatives. A decision to form a task force was the result.

Kreidler says companies like Swiss Re, which insure other insurance companies, have a global perspective the commissioners want to bring down to the state level. If industry risk models are changing, how does that affect pricing and availability of insurance products at the state level?

Some insurance companies are pulling out of states where risk levels are unacceptable, he notes. If you lose insurance, you lose your businesses.

Kreidler says the industry can become an advocate for actions that will mitigate risks to agriculture or salmon, or that might reduce the loss of second homes encroaching on timberlands. A drier climate, he notes, exposes trees to pests that may not have been a problem historically.

Wagner says he wants to know if and how insurers are adjusting to increased climate risks, not just in their assessment of property risk, but also in their investment choices. Also, he asks, is the industry doing enough to advocate land-use planning that will, for example, discourage unwise building in vulnerable coastal areas, where increases in valuation outstrip national averages?

“We are developing a concentration of risk,” he says. “The risk is almost infinite, our capital is finite.”

Wagner says state regulators may not have much leverage, but they could weigh more critically the reserves insurers have set aside for catastrophic losses.

With insurers increasing pressure for the federal government to take over regulation of the industry, the climate task force will give state commissioners an opportunity to show they have more than a parochial perspective. An umbrella, if you will, against federal usurpation of their powers.