Insurers in the eye of the storm

As the world assesses the damage caused by Hurricane Dean, Vicki Bakhshi, Associate Director in F&C's Governance and Sustainable Investment team, warns insurance companies need to put more effort into adapting their risk models to take into account these increasingly common extreme weather events.

"The first major Atlantic hurricane of the season has highlighted, once again, how vulnerable we all are to extreme weather conditions. As well as the tragedy of human loss, Dean has caused big economic losses including extensive damage to property and the shutdown of businesses. It has also raised fresh concerns about the impact of hurricanes on the Gulf's oil industry," she explained.

Estimates indicate that insured losses from the hurricane are likely to range between $750m and $1.5bn. Although there is no evidence that individual hurricanes like Dean are a consequence of climate change, science tells us that warmer seas and warmer weather are likely to make hurricanes more intense. According to the Intergovernmental Panel on Climate Change (IPCC), tropical cyclones could become more severe with greater wind speeds and more intense rainfall.

"Despite the change in climate conditions, the risk models used by insurers are almost entirely based on historical patterns, not on climate science, and they do not take into account this upward shift in the risks," argued Bakhshi. "This means insurers might be underpricing risk. And some may also be underestimating the amount of capital they need to survive the kind of mega-catastrophes that are more likely to occur as a result of climate change."

F&C has been researching how insurance companies are responding to climate change, and will be publishing a report soon.

"The good news is that the sector is starting to wake up, and some risk models are now beginning to be amended. But the question is: which will change faster, the way the insurance sector operates or the weather?" added Bakhshi.