Weather and climate are critical variables for the insurance industry. When weather patterns are reasonably stable, the magnitude of possible losses from storms, droughts and floods can be predicted. The industry can then price and spread weather-related risk across multiple policy-holders. But a warmer and more volatile climate will bring unpredictable losses, undermining the insurers' capacity to calculate, price and spread weather-related risk.

The insurance industry was one of the earliest to recognise that climate change will produce more extreme and frequent severe weather events and natural disasters. Industry figures show a threefold increase in the incidence of natural disasters since the 1960s, incurring a 900% increase in economic costs. In the wake of the 2003 European heat wave, Munich Re, the world's largest re-insurer, reported record claims of US$13billion. The company has little doubt that climate change will increase the frequency of these catastrophes:

Exceptional individual events of the past year like the heat wave again provided strong indications of climate change. They show that new types of weather risks and greater loss potentials must be reckoned with in the future...Dr. Gerhard Berz, Head of Munich Re's Geo Risks Research Department: "We will have to get used to the fact that hot summers like the one we had in Europe this year must be expected more frequently in the future. It is possible that they will have become more or less the norm by the middle of the century. The summer of 2003 was a "summer of the future", so to speak. For many years we have been warning about the elevated danger of heat waves and the associated problems and risks. Warmer summers mean a rise in the intensity and frequency of severe weather events.[1]

According to Munich Re, of the 8,820 natural catastrophes analysed worldwide between 1960 and 1999, 85% were weather-related, as were 75% of the economic losses and 87% of the insured losses. Losses in Australia show similar trends, with around 87% of economic losses caused by weather-related events, as shown in the table below.

The table below reports the cost of natural disasters from 1967 to 1999:

	NSW	QLD	NT	VIC	WA	SA	TAS	ACT	Total ($m)	% of total
Floods	128.4	111.7	8.3	38.5	2.6	18.1	6.7	0	314.3	28.9
Severe Storms	195.8	37.3	0	22.8	11.1	16.2	1.1	0.1	284.4	26.2
Cyclones	0.5	89.8	134.2	0	41.6	0	0	0	266.1	24.5
Earthquakes	141.2	0	0.3	0	3	0	0	0	144.5	13.3
Bushfires	16.8	0.4	0	32.4	4.5	11.9	11.2	0	77.2	7.1
Landslide	1.2	0	0	0	0	0	0	0	1.2	0.1
Total ($m)	483.9	239.2	142.6	93.6	62.7	46.2	18.9	0.2	1087.3	100.0

Source: BTE analysis of Emergency Management Australia (EMATrack) database
(unpublished; in WWF Climate Change: extreme weather events and its cost).

The IPCC also confirms that "the combined effect of increasingly severe climatic events and underlying socio-economic trends (such as population growth and unplanned urbanisation) have the potential to undermine the value of business assets, diminish investment viability and stress insurers, re-insurers, and banks to the point of impaired profitability and even insolvency."[2]

Rising insurance premiums or withdrawal of insurance coverage in some areas or for some risks may exacerbate existing socioeconomic vulnerabilities. Those households that cannot afford to insure their homes and contents are also unlikely to afford modifications to their homes. Other trends that may magnify weather-related losses include population movement to more marginal and vulnerable areas, where they will be exposed to increasingly severe and frequent weather events.

See also: Housing

In the words of Thomas Loster, climate expert at Munich Re, "We need to stop this dangerous experiment humankind is conducting on the Earth's atmosphere".