Climate Change 2001:
Working Group II: Impacts, Adaptation and Vulnerability
Other reports in this collection Government-Based Insurance and Disaster-Relief Systems

Government entities are vulnerable to climate change as providers of insurance and/or disaster relief; providers of domestic and international disaster preparedness/services; and managers of property and weather-sensitive activities.

Private insurers find certain weather-related risks to be technically uninsurable as a result of their spatial concentration, actuarial uncertainty, and associated difficulties in pricing. In the United States, this problem arises mostly with respect to crop and flood risks, although government flood insurance is limited to residential and very small commercial customers. There is ongoing tension between government and private-sector players in the natural disaster arena, with each looking to the other to clarify the somewhat ambiguous division of responsibility.

In Canada, government (federal, provincial, and municipal) has paid most of the natural disaster payments, amounting to US$15 billion (CDN$22 billion) in disaster relief between 1982 and 1999, including 86% of flood-related losses (Emergency Preparedness Canada, 2000). Consolidated data for U.S. government payments for natural disasters are not readily available. One source reports US$119 billion (1993US$) in government outlays between 1977 and 1993 (Anderson, 2000).

Government insurance programs can have difficulty achieving solvency, as exemplified by the US$810 million deficit in the U.S. flood insurance program in the mid-1990s (Anderson, 2000). U.S. crop and flood insurance programs have never been profitable, and growing coastal erosion risks will require doubling of rates in the United States (GAO, 2000; Heinz Center, 2000). Government insurance programs also have resulted in cases of maladaptation (e.g., inducing people to settle in vulnerable areas) (Heinz Center, 2000). Creating and Maintaining Adaptive Capacity

Private and public insurers alike have at their disposal a variety of tools to increase adaptive capacity. These tools can be divided into the broad categories of risk spreading and risk reduction (see Chapter 8). Some of these strategies involve shifting of risk between the public and private spheres, or even back to the consumer, and in that regard have considerable public policy ramifications that are beyond the scope of this chapter.

Given their sensitivity and potential vulnerability to weather-related losses, North American insurers and their regulators have designed a variety of adaptation mechanisms. These strategies include economic measures—raising premiums or deductibles, withdrawing coverage, creating systems for pooling risks among multiple insurers (e.g., U.S. government-mandated FAIR Plans or beach/windstorm plans and state-mandated "guaranty funds" based on mandatory contributions of insurers, to pay the claims of insolvent insurers)—and the use of capital market alternatives to finance risk (see Chapter 8). Responses also include more engineering-oriented risk-reduction strategies, such as land-use planning, flood control, cloud seeding (see Section, and early warning systems.

Hurricane Andrew in 1992 and the 1998 ice storm (see Section were wake-up calls for the North American insurance industry. Among the numerous responses have been increased utilization of catastrophe modeling, a more proactive stance toward disaster preparedness/recovery, new efforts in land-use planning, increased attention to building codes, and increased use of incentives to implement loss-prevention measures (Bruce et al., 1999b).

One embedded vulnerability facing insurers and government risk managers alike is that, by design, their actuarial outlook and disaster reserving conventions are based on past experience. There is an emerging and encouraging trend to forward-looking catastrophe modeling, although it has yet to integrate knowledge from climate change modeling. Thus, under climate change, the potential for surprise is real. Vulnerability is compounded by the potential for changes in the frequency, variability, and/or spatial distribution of extreme weather events. Increased uncertainties of this nature can complicate and confound insurer methods for preparing for future events (Chichilnisky and Heal, 1998). Equity and Sustainability Issues in Relation to Insurance

Although North America is a wealthy region, significant equity considerations arise from its cultural and economic diversity (Hooke, 2000). This raises important issues concerning the design and deployment of effective natural disaster preparedness programs (Solis et al., 1997). Lower income groups tend to live in more vulnerable housing and are least able to afford potential increases in insurance costs by insurers or cross-subsidies utilized to spread risks (Miller et al., 2000). Poorer individuals also tend to carry little if any life and health insurance and thus may be uninsured against public health risks such as urban heat catastrophes or urban air quality risks posed by climate change (see Chapter 9).

In some cases, sustainable development and environmental protection complement insurance loss reduction objectives. Examples include protection or restoration of wetland areas that increases tidal flooding defense, sustainable forest practices that reduce risk of inland flooding and mudslides, or agricultural practices that increase drought resistance or reduce soil erosion (see Chapters 5 and 8; Scott and Coustalin, 1995; Hamilton, 2000). Similarly on the end-user side, a variety of energy conservation and renewable energy measures have been found to offer insurance loss-control co-benefits (Mills, 1996, 1999; Nutter, 1996; Mills and Knoepfel, 1997; American Insurance Association, 1999; Vine et al., 1999). The insurance sector itself has begun to examine its activities within the broader framework of sustainability (Mileti, 1997; Kunreuther and Roth, 1998).

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