Because US infrastructure is not built to withstand climate change the cost of the disaster will be relatively high

Hurricane Katrina in 2005 was “the first taste of a bitter cup that will be proffered to us over and over again,” according to former US vice president Al Gore at the time.

Since then, Hurricane Sandy in 2012 and now Hurricane Harvey have borne out this prediction. The latest storm may turn out to be less fatal than Katrina, which killed more than 1,800 people but in economic terms it may be as bad. Hurricane Katrina cost about $160bn (£124bn) in economic losses in today’s terms, accounting for the last decade’s inflation, while Sandy wrought about $70bn in damage.

A timeline of the billion-dollar weather disasters in the US over the past decade Read more

Preliminary estimates for the damage caused by Harvey are wide apart, spanning $90bn to $190bn, reflecting the difficulty of judging an unfolding disaster.

Bob Ward, policy and communications director at the Grantham Research Institute on Climate Change and the Environment, at the London School of Economics, says: “Hurricane Harvey may turn out to be the most damaging weather disaster to have hit the US. It will take some time before we know what the full cost is [and] in addition to the physical damage there will be the economic losses from businesses that cannot operate. If Houston is slow to recover from the impacts, the losses will mount.”

In the UK, motorists have been warned that petrol prices are likely to rise sharply as the effect of Hurricane Harvey on oil production is felt.

If past disasters are anything to go by, about half of the direct, local cost of Hurricane Harvey is likely to be picked up eventually by insurers, with the rest borne by the public purse and by individuals and businesses. Insurers have taken an increasingly active role in the last decade in warning of the potential for more intense storms, floods, droughts and other natural disasters as a result of climate change, and of our failure to protect a rising population and increasingly complex infrastructure against these effects.

“We have been working on climate change since the 1970s,” says Ernst Rauch, head of climate and public sector business development at Munich Re. “We are one of the largest risk takers and it is essential we understand these potential risks. This is crucial to us.”

For insurers, the key issue is the resilience of populations and infrastructure – the ability to deal with disasters when they happen. In most situations, this requires government planning, working with the private sector to help proof homes and buildings against severe weather. But while insurers have grown acutely aware of these risks, governments and other parts of the private sector have lagged behind.

“We see the need at a global scale for societies and public risk managers like government and local authorities to pay more attention to the reduction of risk and resilience building,” says Rauch. “Otherwise we will see an ongoing increase in losses, driven and intensified by climate change.”

Weather catastrophes are now six times more frequent than in 1950

Caspar Honegger, who heads global flood peril assessment at Swiss Re, reports that after Superstorm Sandy hit New York, the city asked his team to analyse the climate risks for the next 40 years. They found that rising sea levels and the increasing frequency of storms would raise average annual losses by 170% to $4.4bn.

ClimateWise – a coalition of 29 insurers including Allianz, Lloyd’s, Zurich, Prudential and Swiss Re – warned of a growing “protection gap” between the cost of natural disasters and the amount insured for. The group said weather catastrophes – which are now six times more frequent than in 1950 – are making some assets uninsurable and advised more investment in building resilience against floods and heat waves.

The online property company Zillow estimates that 1.9 million homes in the US, valued at a combined $882bn, could be submerged by the end of the century as sea levels rise and storm surges erode coastlines and riverbanks. Florida would be worst affected, losing one in eight properties, followed by Hawaii with one in 10.

Insurers now treat this as a board level issue, with chief executives reporting to their shareholders on the increasing risk from climate-related disasters, and working with the UN, World Bank and national governments. As their business relies on understanding risk, they have taken a lead not just in pricing in new risks but in encouraging efforts to reduce them. Insurers are among the top global investors in renewable energy, and some are considering divesting from fossil fuels. They have funded studies of vulnerability and ways to adapt to climate change, and urged governments to protect their populations from the potential ravages of warming.

Yet not enough is being done, warns Rauch. “Not enough account is taken of climate change at the public decision-making level. Climate change is not something that is going to have an impact in a hundred years, its impact is already felt today. That’s why we need to adapt to the consequences, such as by investing in infrastructure, fortifying homes, building levees and dykes, maybe removing homes from highly exposed zones.”

In part this lack of preparedness is down to the cost of equipping communities with better protection and better recovery mechanisms. But for more than a decade, since the pivotal Stern review of the economics of climate change in 2006, an increasing body of work has demonstrated that dealing with emissions and the probable effects of climate change now will save money in the medium and longer term. “The longer we fail to act the more expensive it will be; the sooner we act, the cheaper. Doing nothing will be much more expensive,” says Rauch.

But insurance does offer one big advantage in assessing the likely impacts of climate disasters, says Rauch. “We are very transparent. Insurance premiums reflect risk based on two factors: first is the underlying hazard, that is the probability of an event occurring, and the second is the vulnerability if an event occurs. If the hazard is driven up by climate change, you can still reduce vulnerability, by investing in protection and fortifying homes, such as by building them to higher standards. Then the premiums could remain constant. But if you keep everything as it is today and the risk goes up, they would have to rise.”



In Florida, for instance, lax building regulations mean buildings are more vulnerable, as well as more at risk, and premiums are higher accordingly – more than $2,000 for insurance coverage that would cost less than €200 in Germany, according to Rauch. “At the end of the day, insurance is a simple system and one of the biggest benefits is that we put a price tag on risk – so in a functioning market everyone can understand where the risk is higher.”