Insurance and Other Financial Services

5.1.2.e

Rising cost of weather related disasters around the world

Today the major impact of weather on financial services is caused by extreme events. Some countries are more vulnerable than because of their geographical location, their population distribution, or their national wealth. In developing countries, there may be high mortality from extreme weather but relatively small costs to the financial sector because of low levels of insurance. In developed nations, the loss of life may be much less but there may be huge costs to the insurance industry.

Of the 40 worst catastrophes that happened around the world, between 1970 and 1999, in terms of insurance losses and fatalities:

• Only six were not weather related.
• Nineteen of the weather-related catastrophes affected the United States.
• Twenty-eight were related to windstorm (tropical and temperate latitudes)

Of the 40 worst events between 1970 and 1999 in terms of fatalities:

• Only 16 were weather related, of which 13 occurred in Asia.

Table 1. Global Billion-dollar and larger insurance losses, 1970-1999, as of December 2000 Figures are adjusted for inflation (1999 values). Source: IPCC

CHART NEEDED— 6 Columns, 31  Rows
Table 1 includes a list of natural disasters causing billion-dollar losses.

ACTIVITY 1
a) Count the number of events in the “Events” column. What is the total?
b) Calculate the percentage that affected Europe, North America, and Asia.

1. What is the only kind of disaster that is not weather related?
2. Describe the difference between insured losses and economic losses. Why are the economic losses higher?

In recent decades, economic and insured losses related to weather extremes have increased rapidly (see Figure 1).

Two possible principle causes of recent trends in climate variables are:

1. Changes in the natural modes of variability of the global climate system. An example is the Southern Oscillation, with its two characteristic modes of El Niño and La Niña. In the 1980s and 1990s there were more frequent and longer El Niño events. The longest El Niño of the 20th century lasted from 1991 to 1995. The most intense El Niño of the twentieth century occurred soon after, in 1997-1998.

2. Anthropogenic (human-caused) global warming.. You could expect that global warming would lead to more high-temperature extremes and fewer days with very low temperatures. There is evidence that the latter trend already is occurring. (See Global Temperature Trends).

Figure 1. The costs of catastrophic events in recent decades. (Source. IPCC )

3.  Calculate the ratio of 1990:1950 weather related events. How many times greater is the 1990 frequency compared with the 1950 frequency?
4. Calculate the same ratio for the non-weather related events. How many times greater is the frequency of non-weather related events? Is it as great as the weather related increase?
5. How much have the economic losses increased by?
6. What has been the increase in insured losses since the 1960s?
7. Look at the economic trend and insured trend curves on the graph. Describe each trend. Why do you think there is an increasing difference between these two trends?