Ceres report highlights challenges home and casualty insurers face from damages posed by extreme weather events.

Reporting on the economic impacts of climate change is generally hampered by a lack of specificity and muted by careful dancing around claims of direct causation.

Moreover, the research reports that do big-picture cost analysis often hinge on arcane issues of discount rates and struggle with calculating precisely how much mitigation costs now will save in adaptation costs down the road. The future costs of climate disaster typically cited — always in the trillions — are eye-glazing figures: They may catch attention but are vague enough in personal impact that they can be ignored or just suppressed in the minds of many citizens.

The nexus of insurance and climate change, however, is less abstract and more immediate and real-world. Whether or not one “believes” in human-induced climate change is of little consequence when homeowner premiums are at issue and regional weather trends are the driver. That makes the specific pricing of risk front and center.

And at that point, as the saying goes, it’s just business.

A new report published by Ceres, a nonprofit group that focuses on climate change issues and the insurance industry, makes plain the rising financial stakes as extreme weather threatens home and commercial property — and much more.

Estimated U.S. insurance payouts for extreme weather and catastrophe losses reached $44 billion in 2011 — a net underwriting loss of $34 billion — the most since 2005, the year of Hurricane Katrina, the report notes.

The report, “Stormy Futures for U.S. Property/Casualty Insurers,” synthesizes research data from a variety of sources. There is much that may be of interest to the media and useful as context, including:

• Even controlling for inflation, U.S. insurers have seen a 30-year upward trend in costs from natural disasters, according to data from the reinsurance company Munich Re’s NatCatService.
• Insurance losses resulting from excessive precipitation in the U.S. were the highest on record over the period 2008-11.
• Regions with exposure to high winds are experiencing increases in homeowner premiums averaging 5 to 12 percent, according to MarketScout. Insurers in these areas are reducing coverage availability and requiring better building construction.
• In the first quarter of 2012, regions with high exposure to catastrophic events generally saw rates go up by 10 to 20 percent, according to the Willis Group and Marsh & McLennan.
• Temperature increases and associated extreme weather may be reflected not only in storm damage but in crop losses, wildfire losses, infrastructure outages, and supply chain disruptions. For example, a 2012 University of Illinois report estimates $18 billion in drought-related losses for publicly owned crop insurers this year; because of reinsurance agreements with the federal government, taxpayers may have to assume $10 billion of this total.
• Extreme weather events globally accounted for roughly $50 billion in insurance payouts in 2011. Such events can affect global supply chains, creating economic impacts far from the disaster itself. For example, flooding in Thailand in 2011 contributed to sharp reductions in computer shipments to the U.S. in early 2012.
• Since 1990, the costs assumed by the U.S. government for potential hurricane damage have increased by 15 times, and stood at $885 billion in 2011, according to the Insurance Information Institute. To keep insurance rates artificially low for homeowners — so that they don’t reflect true risk — there will be increasing pressure for even more taxpayer guarantees in hurricane-prone regions.

The Ceres report also touches on the emerging issue of how the predictions of the large commercial weather modelers — an industry dominated by just three firms, AIR, RMS and EQECAT — are changing. In the case of RMS, the firm’s latest model predicts that the chances of a Category 3 hurricane hitting the Atlantic Coast has increased by 20 percent compared with previous models.

This matters in the U.S., ultimately, because the large insurance firms calculate rates based on these models — provided that state insurance commissioner’s offices will approve rate increases. (See The Yale Forum‘s previous discussion of these complex dynamics.)

But as noted by a June 2012 Wall Street Journal article, “Insurers Now Take Grain of Salt with Catastrophe Models,” climate science and the industry’s pricing may be diverging ever-more radically in some cases. This growing tension is perhaps inevitable, as the weather data point toward increasingly expensive risks even as regulators and companies continue to try to hold down new costs for policyholders.

For an organization like Ceres, which is trying to push the insurance industry in a more science-based and climate-friendly direction, this tension is sure to be a key area of focus in the future, and for those in the media it is certainly an area well worth watching.

The Ceres report comes as reinsurance giant Munich Re also issued a new analysis of the link between climate change and weather disasters; it notes that a 30-year upward trend in extreme weather events globally has been particularly acute in North America.