THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Monday, June 3, 1996 TAG: 9606010131
SECTION: BUSINESS WEEKLY PAGE: 04 EDITION: FINAL
TYPE: Opinion
SOURCE: Ted Evanoff
LENGTH: 81 lines
This past winter in northern Michigan, 18 feet and 1 3/4 inches of snow fell on the little town of Leland, surpassing the old record by 2 feet and the annual average by 5 feet, 10 inches.
Even as the drifts melted, drought dried the southern Great Plains while the upper Mississippi River valley flooded. No wonder the insurance executives who gathered in Kansas City for a spring convention said maybe the world is warming up.
All this hit home last month when the Insurance Services Office Inc. of New York, a research arm of the insurance industry, issued a report called Managing Catastrophe Risk.
ISO reported about what you'd expect: Coastal property insurers had a terrible year in '95. Losses reached $8.3 billion on property nationwide insured against natural catastrophes, including the year's Big Three - Hurricanes Erin, Marilyn and Opal.
What stood out in the report, though, was the history of catastrophes. When ISO checked disaster records back to '61 and calculated past losses in terms of the dollar's current buying power, only three years looked worst than '95, and the three years were all '90s neighbors.
``The three costliest years for catastrophes were 1989, with Hurricane Hugo and the Loma Prieta earthquake; 1992, with Hurricanes Andrew and Iniki; and 1994, with the Northridge earthquake,'' ISO reported. ``This surge in catastrophe losses follows 28 years with much lower catastrophe losses.''
Hurricanes, blizzards, floods, droughts. It's enough to suggest the insurance execs in Kansas City were right - maybe global warming has set off an erratic and variable pattern that's made the weather weird. But hang on to that thought.
We've seen some pretty extreme variability in the weather,'' said meteorologist Bob Lindmeier, vice president of Weather Central Inc., a forecaster in Madison, Wis.
``There was record snow in the UP (Upper Peninsula of Michigan), drought and floods on the Plains and the Upper Midwest,'' Lindmeier said. ``Some would say the Greenhouse Effect is taking its toll. As the atmosphere warms up, the weather patterns change.''
But Lindmeier points out no one understands why the weather changes so sharply.
``It's hard to come to any easy solution,'' Lindmeier said. ``People look at the current statistics and say how extreme it is. But if you look at what a normal high is, it's an average of the extremes. We have many daily records from the 1880s that still haven't been broken.''
Yes, insurers have watched disaster payouts mount in recent years, he said, but they've done so for a logical reason. The population has shifted.
Far more people today than a few years ago live near the hurricane coasts and the earthquake fault lines. Many are insured. Even a moderate hurricane can cause heavy losses.
Look at what happened when Hurricane Andrew came ashore near Miami in '92. Insurers counted $16.8 billion in disaster losses in south Florida, an amount that ISO said exceeded all the insured catastrophes throughout the United States during the entire decade of the '70s.
Wild swings in the weather may be more common, but it wasn't the Greenhouse Effect that led ISO to produce Managing Catastrophic Risk. It was Hurricane Andrew.
``Before Andrew, not many insurance companies worried about catastrophic losses. They only believed what they had seen in the recent past and in the recent past the damages had not seemed excessive,'' said Karen Clark, president of Applied Insurance Research, a Boston firm whose computer models forecast disaster damages.
``What's changed in the industry is the perception of how large these losses can be.''
In fact, ISO's basis for Managing Catastrophic Risk was a computer model and a survey of 80 insurer groups.
The model projected a hurricane, say, of Andrew's magnitude, could cause damage exceeding $50 billion if it hit a congested city such as Miami proper. Losses of that magnitude would leave up to 36 percent of the surveyed insurers insolvent.
Even a $25 billion storm, which is to be expected every quarter century, would render up to 10 percent of the insurers insolvent and leave customers with more than $3 billion worth of unpaid claims, ISO said.
``The property/casualty insurance industry does not have enough capital to absorb rare but costly catastrophic events,'' ISO concluded. ``The industry needs an external source of funds to pay for these events.''
KEYWORDS: INSURANCE INDUSTRY by CNB