Freak weather threatens pay out by insurers

As global warming increases damage to life and propertymany insurers find themselves stretched to meet the ever-increasing cost of climate-related claims.

Says Gari Dombo, Managing Director, Alexander Forbes Insurance, “Hurricanes, tropical storms, wild fires, earthquakes and tsunami’s cause destruction on a massive scale. Repairing the damage caused by these events has implications for insurers and re-insurers."

The extent of the loss sustained during the 2006 hurricane season in the Gulf of Mexico saw claim repudiation skyrocket as several underwriters declared bankruptcy. To avoid economic collapse and civil unrest on the United States south coast the Federal Reserve, as insurer of last resort, stepped in. Insurers simply did not have the resources to underwrite the scale of damage caused by this hurricane.

Domboreports that, “The increase in violence of what is now called extreme weather is forcing insurers to consider loss on a scale not previously contemplated – and certainly not factored into current premium calculations or re-insurance deals.”

Historically, premiums were set by observing weather patterns.Climatologistsand actuaries worked outreliableclimate models. Using these models insurers wereable to predict damage andaccurately pricepremiums.

In South Africathe Financial Services Board (FSB)specifiessolvency marginsaimed atpreventing insurers from failing clients. While a brilliant idea,the margins currently associated with this legislationwere driven byhistorically stable weather patterns.In future weather patters will be more extreme.

With extreme weather traditionalclimate models, and much of the historical data that supported them, become irrelevant.

“This is where the reputational issues of an insurer come into play. Policy holders shouldlook at theirinsurers balance sheets and understand their financial status. All of this is publicly available- though few people ever do the research”, says Dombo.

Dombo also believes that, “While size does count, equally importantis an insurersmore recent pay out history - especiallypayouts followinginstances of extreme weather."

Similarly,the kind of relationships that insurers have developed with their re-insurers is alsoimportant.Dombo concludes that, “As incidents of extreme weatherbecome more frequent, itisimportantto know that your insurer is suitably re-insured to meet all its obligations."