A View From The Press Box

Instead of obsessing or arguing over the global threat posed by climate change, property insurers should focus on practical steps to limit catastrophe exposures on individual homes and businesses, the panel agreed--even though they did not all agree about the cause of global warming, or its results.

Indeed, they argued, it is far more productive for insurers to concentrate on risk management efforts—such as changing land-use regulations, bolstering building codes and improving the quality of underwriting data—than getting caught up in the controversy over the causes and long-term impact of global warming, suggested the panel, moderated by Regis Coccia, editor of Business Insurance.

“By focusing on the debate over climate change, we’ve taken our eye off the ball on the root of the problem, which is land-use management,” said Sergio Prete, vice president of catastrophe exposures at FM Global.

“More homeowners and businesses are moving to where hurricanes hit,” he added. “Our focus should not be on what we can do about climate change, but how we can more sensibly manage land use to minimize the damage when catastrophes strike.”

Mr. Prete argued that “we must basically change the mindset that this is Mother Nature, and there’s nothing we can do about this, when in fact we can. Once you underwrite what the risks are, there are engineering solutions to fortify properties. You are not at the mercy of Mother Nature.”

He added that “we’ve seen over the last seven storms that structures built correctly can survive.”

Mr. Prete conceded that he is a skeptic when it comes to whether human abuse of the environment is causing global warming, prompting more severe storm losses. “We haven’t seen any convincing evidence linking climate change with the increase in the frequency and severity of windstorms,” he said.

However, he later noted, “the truth is that even if we could somehow magically shut off generators of greenhouse gasses, it would take many decades to see an impact on the climate, so it is imperative that we take practical steps now to deal with the realities we face with storm damage, no matter what the cause.”

One big problem is that catastrophe models are not reliable predictors of when or where a monster hurricane is going to strike, according to Karen Clark, vice chair of AIR Worldwide, one of the leading modeling firms.

“A model is just that—a model. It is still based on many simplifying assumptions, with a high degree of uncertainty,” she said. “It can tell you, given where you have your insureds, what the maximum probable loss would be should a storm of a certain strength hit a certain area, but the question of frequency is more vexing.”

However, she noted that “while there is no consensus at all on climate change and the frequency of hurricane landfalls, most scientists agree that when storms do hit these days, their intensity is likely to be greater and will cause more damage.”

Therefore, she suggested, “instead of looking for predictability from models, you should use them to come up with plausible planning scenarios depending on where they might hit, whenever that might be.”

Mark Way , senior vice president at Swiss Re--one of the insurance industry’s leaders in combating global warming—emphasized that “the lack of certainty on modeling is no excuse for inaction. You have to be prepared for the worst.”

One way to be better prepared is for insurers to push for stronger building codes, the panelists agreed.

“Strongly enforced building codes do make a difference,” said Ms. Clark. “It doesn’t take rocket scientists to come up with sound codes. We already know how to build structures that can better withstand windstorms. The question is whether we have the political will to implement them.”

Mr. Way of Swiss Re agreed that “a two-track approach is needed. There is lots of low-hanging fruit as far as practical steps we can take to reduce the increase in catastrophe losses.”

Challenging the industry to do a better job of underwriting risks in catastrophe-prone areas was Roger Pielke Jr., professor of environmental studies at Colorado State University.

“I would suggest that instead of focusing on predicting the likelihood of a storm striking a particular area, which is very problematic, that insurers spend more time on the ground assessing individual homes and businesses,” he said. “I am sure there are plenty of properties in Florida, for example, and other coastal areas that are still good bets to insure.”

Mr. Prete of FM Global called Mr. Pielke’s advice “music to my ears. Differently constructed properties will stand up very differently depending on the risk—whether it’s wind, fire or an earthquake.”

He suggested that “rather than play probabilities—what are the odds of an event occurring in a particular location—I would be deterministic, in that if a catastrophe hits a specific property, what can we do to limit the damage beforehand?”

Can anyone argue with this logic? This industry should always put risk management first, but too often loses sight of the long-term benefit of loss control--especially in a softening market like this.