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Insurance Companies Already Feeling Sandy's Effects


Long before Sandy made landfall, insurance companies were feeling the effects. Shares were down for several major insurers last week in anticipation of the storm and what it would do to their bottom line. The weather risk researchers for the insurance giant Munich Re have studied extreme weather in North America since 1980 and found that payouts for the industry total half a trillion dollars. To talk more about what kind of effects storms like Sandy are having on the way insurance industry does business, we turn to Ben Berkowitz, who reports on the industry for Reuters. Hi there, Ben.

BEN BERKOWITZ: Hi. Good afternoon.

CORNISH: So at this point, what are the estimates for the cost of Hurricane Sandy? How does it rank among the costliest storms?

BERKOWITZ: Right now the best estimates are somewhere in the neighborhood of five to $10 billion, just insured losses, which would probably put Sandy in the worst five hurricanes of all time.

CORNISH: Now, over the years, what kind of changes have insurers made to try and curb exposure to hurricane-related payouts?

BERKOWITZ: They've done a few different things to try to minimize their exposure. In some cases, depending on what part of the country you're in, one of the things they've done - and this is actually a more recent change - is to tell homeowners, if you want to be covered, you've got to put a new roof on the house or you have to take certain other steps that are designed to essentially keep the house from falling apart in a storm. In other parts of the country, they have just simply pulled out of the market entirely and said, we don't want to do business there. There is just far too much risk.

CORNISH: What kind of changes have they made to the insurance policies that people already hold?

BERKOWITZ: They've done a few different things. One of the most notable ones is hurricane deductibles. So, again, depending on what state you're in and what insurance company you have, in some cases you may have to actually pay more out of your own pocket if your house is damaged by a hurricane than, say, if it was a tornado or some other kind of incident.

CORNISH: Now, Ben, earlier I mentioned a report by the insurance giant Munich Re about insurance industry losses. That same report also discusses climate change at one point saying, this is a quote: "Climate change particularly affects formation of heat waves, droughts, intense precipitation events, and in the long run, most probably also tropical cyclone intensity."

I mean, they discuss an express link in their point of view between climate change and the frequency of severe weather events in North America. How common is this view within the insurance industry?

BERKOWITZ: It's growing. It's growing. There is - Munich Re is one of the biggest proponents of that view, and really they've been such a big proponent for so long that they've brought a lot of other insurers around to their point of view. And you'll still find insurers who say, we don't believe in climate change or we believe the science is unclear or we believe that something is happening but it's not clear what. And then on the other spectrum you do have insurers, like Munich Re, that acknowledge something clearly has changed. Things are clearly getting worse, and we have to insure accordingly.

CORNISH: So at this point, are insurers essentially recalibrating their models because of what they believe about climate change, is that affecting our premiums?

BERKOWITZ: Insurers are absolutely taking a fresh look at how they structure and how they price policies, particularly the ones that really embraced the climate change theories. They fully believe that something is changing and that they have to, for the sake of their business models, look at how they price and allocate risk differently.

CORNISH: Do you find that there is a sort of an increasing mini industry of georisk folks, meteorologists, people who work for the insurers?

BERKOWITZ: There is nothing mini about it. It's an enormous business. It's something that every insurance company spends very, very heavily on. It's something that there are lots and lots of meteorologists around the world engaged in and scientists, physicists, climatologists, what have you. It's become a tremendous business, this science of trying to predict what bad things will happen where.

CORNISH: Ben Berkowitz reports on the insurance industry for Reuters. Ben, thank you for talking with me.

BERKOWITZ: Pleasure to be here. Transcript provided by NPR, Copyright NPR.

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