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PRI's Environmental News Magazine

Insuring for a Hurricane

Air Date: Week of July 21, 2006

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An approaching hurricane season could make beachfront properties risky investments. (Photo courtesy of: NASA)

The last two deadly hurricane seasons set records for frequency, intensity and damage, but this year is expected to be as bad or worse. Living on Earth’s Bruce Gellerman reports that insurance companies are using sophisticated models to hedge their bets and determine if global warming is playing a role.

Transcript

CURWOOD: From the Jennifer and Ted Stanley Studios in Somerville, Massachusetts - this is Living on Earth. I’m Steve Curwood.

As coastal residents keep a watchful eye on the sky this hurricane season, they’re also watching their wallets. The past two years have seen hurricanes set records for frequency and intensity. As they have ripped through the homes and lives of coastal dwellers, they’ve killed thousands of people and left behind an estimated 175 billion dollars of damage and destruction. Now while personal losses in some cases have been staggering, with more than 75 billion in uninsured losses, in other cases insurance companies have helped soften the blow. But affordable insurance has become harder and harder to get. And some scientists warn that climate change will make the storms even worse.

Living on Earth's Bruce Gellerman has our report.

GELLERMAN: If you live along the coast of the United States, and half the population does, just try buying hurricane insurance. Steve Burgess, Insurance Consumer Advocate in Florida, says you're in for a shock.

BURGESS: The consumer is really taking the brunt of a difficult situation.


An approaching hurricane season could make beachfront properties risky investments. (Photo courtesy of: NASA)

GELLERMAN: This year, property owners from the Gulf Coast to New England are seeing hurricane insurance premiums skyrocket, and coverage cut, but nowhere is the problem as bad as in Florida. And nowhere in Florida is it as bad as where Teri Johnston lives: Key West.

JOHNSTON: In fact, most of the people in Key West, their bills have at least doubled, if not tripled. And you know, we're not talking of going from a thousand to 12 hundred dollars. We're talking about going from 5 thousand to 10 thousand dollars.

GELLERMAN: And that's just for windstorm insurance. It’s the only kind of hurricane insurance you can get on the Keys, and the only company offering it is the insurer of last resort in Florida: the quasi state-run Citizens Property Insurance Corporation.

In the wake of the last 2 hurricane seasons, half a dozen Florida insurance companies have gone bankrupt, and others have left the state. Today, Citizens is the largest insurer in Florida, and 1.7 billion dollars in debt. And soon even it will stop writing new policies. State officials call it a crisis. Tracy Casper of West Palm Beach calls it horrific. Over the past decade her windstorm premium has gone from 300 dollars a year to 2,300 dollars last year to 8,300 dollars this year.

CASPER: I was given one month to pay the premium. And I don't care how much money you make, to pull out 8,000 dollars out of any account is, y'know, unsettling.

GELLERMAN: So Casper did what insurance companies do. She calculated the risk and decided not to pay the price.

CASPER: And we just didn’t feel that the risk made us feel that we needed to have that kind of coverage. We would rather take the risk and pay cash for whatever damage we would have. And we feel comfortable with that. But I am one of the few people I know that feels that way. People are so afraid, there's such fear mongering.

GELLERMAN: Hurricane hysteria has gripped the coastal region and is reverberating through the economy. Insurers call the phenomenon demand surge ‘a period of intense inflation in construction materials and services following a mega disaster’. That's one of the reasons insurance companies say they need to raise premiums. Insurance advocate Steve Burgess disagrees.

BURGESS: I think they have vastly overstated the losses that could reasonably be expected for the future year.

GELLERMAN: And Burgess wonders, what are the odds hurricanes this year will be as bad as the last two years?

BURGESS: We can even imagine a storm that’s a category five, that goes through Miami and crosses over and goes through Tampa, picks up steam and goes through the Panhandle. But the question is, how likely is that to happen?

GELLERMAN: Well, that's the 100 billion dollar question isn't it?

BURGESS: Yeah, that's exactly right.

GELLERMAN: According to risk analysts, there's a 3 percent chance a Katrina-size hurricane will strike again this year. Over the next ten years the probability goes up to 30 percent. Determining the odds of a disaster, it's potential cost, and risk to an insurer, is an art and science. And has sparked the creation of a new industry called catastrophe modeling. Catastrophe modelers, or "cat modelers," take into account weather trends, construction styles and designs, building materials and location. Then they compute the unthinkable. Karen Clark is president, founder and CEO of AIR Worldwide. The Boston Company pioneered the catastrophe modeling field.

CLARK: In fact in our model we capture scenarios that we haven't even seen yet. For example, we have simulated years where we could have 12 land falling hurricanes, which historically we haven't seen yet. But we know that it could happen.

GELLERMAN: But the models are only as good as the underlying assumptions that are used. Will there be more storms, or less? Will they be more severe or mild? And the big question: what about global warming? And how will it affect hurricanes? Karen Clark.

CLARK: There is a growing consensus that we are seeing climate change. We are seeing a warmer environment. However, because climate change is really a global phenomenon. It’s much more difficult for scientists to predict, if you will, the exact impact on hurricane activity, because hurricanes in the North Atlantic are a regional phenomenon.

GELLERMAN: Catastrophe modelers have recently consulted with climatologists to determine the effect of global warming on weather. The past two seasons have seen the frequency and intensity of hurricanes go up. But the insurance industry isn't willing, at least yet, to say it's due to climate change.

Ryan Ogaard uses catastrophe models from three different companies. He works for an insurance brokerage firm called Guy Carpenter. It's his job to figure out the risk to an insurance company's portfolio of properties. What's their exposure to disaster? How much money do they need to cover potential losses? The relationship between hurricanes and global warming is definitely on his radar.

OGAARD: Now, is that increased frequency caused by global warming? We don't know well enough and we can't measure that well enough to put it explicitly in the model as global warming, so the models are a bit agnostic about the cause. But they do see the frequency up.

GELLERMAN: The U.S. climate catastrophe models may be a bit agnostic, but European re-insurance firms have gotten the religion of climate change. Re-insurance companies insure insurers. They're known as the riverboat gamblers of the industry, the ones that insurance companies go to to spread their risk.

So while American reinsurers aren’t taking climate change into account, European re-insurers such as Swiss Re and Munich Re have been factoring global warming into their models for years. In fact, Swiss Re is bankrolling this new documentary called The Great Warming, starring Keanu Reeves.

[MOVIE CLIP - REEVES]

GELLERMAN: Hit hard by storms these past two seasons, re-insurance companies here and abroad want more money for assuming risk in today's hurricane environment. So insurance companies have to pay more for their insurance, and so do property owners. Re-insurance companies are largely unregulated. They can charge what the market will bear, and there's little consumers can do about the price of insurance. But, says Karen Clark of AIR Worldwide, people don't have to live in areas where the threat from hurricanes is greatest.

CLARK: Well quite frankly, I think this is one of the biggest problems that we face with respect to property damage from catastrophes, is that we keep building more expensive properties in coastal areas, very prone to severe events. So even if we were not experiencing global warming, the potential for catastrophe losses increases every year.

GELLERMAN: So you don't need to be a weatherman, insurance company, or catastrophe modeler to know which way the hurricane winds will blow. If you live on the coast, you're going to get hit. It's not a question of if…but when. For Living On Earth, I’m Bruce Gellerman.

 

Links

“Florida’s Insurance Crisis” – Miami Herald

Citizen’s Property Insurance Corporation

“Shifting Winds: A Review of Recent Changes in the Direction of Modelers and Rating Agencies”

The Great Warming movie website

 

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