Warmth surge may get price tag

Published March 24, 2007

TALLAHASSEE - Neither of the lawmakers who control committees that write Florida's insurance policy believe in global warming.

But the insurance industry believes in it. And that could affect premiums more and more.

While the debate among politicians continues over whether temperature increases represent a long term trend, the financial markets that are designed to assume the worst are pretty much settled on the matter.

For years, international reinsurance companies, unburdened by regulation or the American political landscape, have factored the ill effects of climate change into the rates they charge retail insurance companies for backstop policies.

Now, some of those same dire assumptions about warmer oceans spawning more frequent and stronger hurricanes could soon be used directly by the retail insurance companies that sell policies in Florida.

State regulators have been asked to approve a new forecasting model on insurance risk in Florida that would, for the first time, look into the future and consider that the oceans are heating up and making hurricanes worse.

Florida is the only state that scrutinizes forecasting models before they can be used in the state, and insurance companies nationwide are watching to see if the new model gets approved.

"Florida is on the frontline for this," said Robert Muir-Wood, a chief researcher for Risk Management Solutions Inc. "It means insurance rates are not simply going to go back to what they were in the 1980s."

RMS, one of several companies that creates risk forecasting models that insurance companies use to help calculate premium rates, has created a model that looks five years into the future. Most other models, including the so-called public model state regulators use to compare the calculations of private company models, depend on past hurricane data.

RMS executives say that as lawmakers lag behind in the debate and don't do their part to cut man-made carbon emissions that they believe contribute to global warming, hurricane forecasting models may never show anything but escalating risk.

Look-ahead model

The California-based company is pushing for states to cut hurricane risk by strengthening houses and by setting tough standards to cut greenhouse gas emissions, as California did.

"Florida is going to be a high hazard region for the long term," Muir-Wood said.

RMS is something of a pioneer on the issue, but it is not out on a limb.

A chief competitor to RMS, Applied Insurance Research, also has created a look-ahead model that takes warming oceans into account. But because AIR executives still have doubts about the link between warmer oceans and hurricane activity the company has not yet proposed the model for use in Florida. And the company pairs up the look-ahead model with a more standard risk forecast that relies on historical averages of hurricane data.

Still, the insurance industry is embracing climate change in a way that U.S. policymakers have not.

Two of the big companies that rate the financial strength of insurance companies, AM Best and Standard & Poor's, also use the new look-forward hurricane models in their evaluations. They give top grades to insurers that have socked away enough money to prepare for riskier storm seasons due to warming ocean temperatures.

"It's not that we say this is scientifically correct, we're just saying it would be prudent for an insurer to be prepared for what is the most devastating of outcomes," said Thomas Mount, an actuary for AM Best.

State Farm and Allstate, two of the biggest retail insurers in Florida, say they operate under the assumption that climate change has increased the risk of hurricanes. But both avoid offering opinions on what's causing warmer sea temperatures or how long they will last.

"Insurance companies are far more advanced in dealing with global warming than government is," said Chris Walker, U.S. director of an environmental advocacy nonprofit called the Climate Group, which helps companies curb emissions while protecting their bottom line.

Walker is on loan to the environmental group, which is based in the United Kingdom, from Swiss Reinsurance Co., the world's largest reinsurer, which began focusing on the dangers of global warming in 1994.

'Purely a risk issue'

"For some, like Swiss Re, (global warming) was purely a risk issue," Walker said. "More storms equals more losses, which would bring financial harm to the company."

But scientists and policymakers aren't so clear-eyed about it.

Most scientists agree that greenhouse gases, both man-made and natural, are warming the oceans, melting glaciers and causing global warming. But some disagree about whether warmer ocean temperatures directly contribute to the frequency or intensity of hurricanes.

They also agree that the Atlantic Ocean is in a heightened period of hurricanes, although they disagree about why and how long that will last.

Last month, an international panel of top scientists from 113 countries called the Intergovernmental Panel on Climate Change declared for the first time that global warming is "more likely than not" causing stronger hurricanes, such as Katrina.

Climate scientist Kerry Emanuel, a professor at the Massachusetts Institute of Technology, says sea surface temperature is the dominant influence on hurricanes. He says most scientists agree with him.

But Stanley Goldenberg, a Miami hurricane meteorologist with the National Oceanic Atmospheric Administration, remains unsure. "If the atmosphere is not favorable, you can have the ocean boiling away and you're not going to get a hurricane," Goldenberg said.

In the meantime, there's only so much that Florida lawmakers can do, when there's still so much dissension as to whether global warming even exists.

Gov. Charlie Crist has made global warming a priority and has his staff looking into carbon-cutting policy issues. While he says there "may be" a link between global warming and worsening hurricanes, he doesn't believe such a link should have any bearing on insurance rates.

Skeptical of industry

The state's consumer advocate on insurance issues, Bob Milligan, is also skeptical of the insurance industry's stance on global warming. He sits on the committee that is analyzing the forward-looking model.

"Global warming is the best supporting argument for insurers seeking higher rates," Milligan said. "Are they right? I don't know. Time will tell."

Senate President Ken Pruitt believes in global warming to the extent that population growth and development are straining the earth's resources. He says that if there is a link between warming oceans and more severe storms, insurers should be able to factor that risk into their premiums.

For state Sen. Bill Posey, the Rockledge Republican who chairs the Senate Banking and Insurance Committee, the matter is a tougher sell. He doesn't believe in global warming and he's not so sure the insurance industry really does either.

"If global warming looks profitable, they'll support it," Posey said. "If it would be more profitable for them to declare global warming a hoax, each and every one of them would."

State Rep. Don Brown, a DeFuniak Springs Republican who chairs the House Insurance Committee, also does not believe in global warming.

Joseph Belth, a retired insurance professor from the Indiana University School of Business, said that lawmakers should look beyond the global warming-hurricane debate and start thinking about what to do in the future.

He agrees that if scientists and insurers are right and global warming exacerbates storms, insurers should be allowed to charge more. But he wonders what happens if the worst-case assumptions don't prove true.

There's no mechanism for giving money back to policyholders.

"Somebody ought to be paying attention to what happens if they guess wrong," he said.