Insurance Industry, Scientists Team Up For Mutual Benefits

The United Nations Convention on Climate Change, held in Berlin March 28-April 7, was marked by a presence hitherto unseen at such events_representatives from the insurance industry. The company officials, who attended in order to learn more about climatic issues, herald a rapidly expanding dialogue between these traditionally mutually exclusive communities, according to both insurance and science observers. SCENE OF CHANGE: BBSR provides scientists and insurers a platform to discuss issues of common interest. For its part, the insurance industry is coming to realize it has a stake in understanding and preventing the risks to life and property posed by environmental hazards and natural disasters, insurance executives say. For scientists, this newfound interest in their work has already begun to manifest itself in employment opportunities as consultants, risk analysts, or researchers on geological and weather-related catastrophes. In the future, some suggest, this alliance could become a lobbying force on environmental issues and a powerful advocate for greater research support. "It is an evolving relationship," observes Eugene Lecomte, president and CEO of the Boston-based Insurance Institute for Property Loss Reduction, a risk-assessment research organization with a special interest in natural hazards. "Scientists, businessmen, and insurance executives, among others, are all stakeholders in the problems that face the natural world." Recent events have brought this message home. A steady spate of weather-related disasters in the past five years proved particularly expensive for the insurance industry_with estimated damages well over $75 billion, according to an article published by the Worldwatch Institute in Washington, D.C., a nonprofit organization that analyzes global resource and environmental issues (C. Flavin, World Watch, 7:10-20, 1994). Perhaps the most devastating, the article reports, was Hurricane Andrew, which hit South Florida in August 1992, resulting in insurance losses totaling nearly $16 billion. Other natural calamities cited in the article include the Mississippi floods and Los Angeles brush fires of 1993. More recently, the Kobe earthquake in Japan in January caused massive damage. "With the increase in numbers of natural disasters, there is a need for better risk management among insurance companies," observes John Kallos, a professor of environmental management at Columbia University Business School. This involves "a greater need for scientific input in terms of what we know about global climate change and its [immediate] impact," as well as other fields, such as geological and oceanographic phenomena. Proponents of science-insurance alliances theorize that a better understanding of the science involved in these environmental hazards could lead, for example, to the creation of better building codes, more appropriate decisions on land use, and better risk evaluation of flood, earthquake, and fire dangers. (For a discussion of the role of risk assessment in government policy-making, see K.Y. Kreeger, The Scientist, May 2, 1994, page 3 and June 27, 1994, page 1). "There is a lot of controversy in the scientific community about the phenomenon of global warming and what it is or is not," notes Lecomte. "We [the insurance industry] do not want to be dragged into [taking sides in] this controversy, as it is not our area of expertise. However, we have to concentrate on the impacts of climate change, and something is definitely happening" in that area. "Antarctica is discernibly warming up," states Christopher Flavin, vice president for research at Worldwatch Institute, citing one indicator of global warming. Long-term consequences of this phenomenon include "the rising of the ocean level, which in turn would cause massive flooding; an increased likelihood of droughts; and the occurrence of tropical storms of greater intensity." Insurance executives agree that any of these would cost them dearly. "We've been lucky so far that the number of deaths in these catastrophes has been relatively low," states Lecomte. "If the Northridge [California] earthquake last year had occurred even three hours later, the freeways and schools would have been full and the death toll much higher. "Will our luck continue? It's impossible to tell, and we do not want to run to chance," he adds, reiterating the importance to the insurance industry of a proper understanding of the scientific issues involved. Although foreknowledge of disaster will not completely enable insurers to avoid covering catastrophe-prone properties, "the need for scientific information is self- evident," claims Richard Sandor, chairman and CEO of Centre Financial Products Ltd., a New York City-based risk management and insurance firm. "Insurers need to be constantly aware of the changes that are occurring in the climate. It gives us a better idea of the risks involved and how better to manage them." Typically, insurance companies have relied on historical data to predict weather changes for the future, and assign risk_depending, essentially, on the laws of probability. But Richard Gordon, a research consultant for the Chubb Group of Insurance Companies, headquartered in Warren, N.J., warns that the value of such data may be limited. "We are dealing with physical phenomena which may not be guided by history. The changes we see may be caused by global warming, or by long-scale variability," he says, referring in the latter case to natural climate changes that may occur over thousands of years. "The history of recorded observation is very short_going back to maybe 100 years. This is not a long time, when the observed phenomenon may be operating on a millennial scale." "We need new, more complex tools for a sounder approach to science-based risk assessment," Kallos maintains. A physicist by training, the Chubb Group's Gordon heads a research team that puts complicated mathematical concepts to work for use in real-world systems: "We develop new and sophisticated techniques and approaches to deal with non- linear [complex] systems, like weather hazards." FORECASTING ALLIANCES: Oceanographer Anthony Knap feels that scientists and insurers have a mutual benefit. While jobs such as Gordon's are still a rarity within insurance companies, people are predicting a growth in employment at the science-insurance interface. "I think there are going to be real career opportunities in this area," predicts Anthony Knap, a chemical oceanographer and director of the Bermuda Biological Station for Research (BBSR) Inc., a nonprofit marine research and education station located in Bermuda. "As peer-reviewed science becomes more and more focused, and government support for the sciences goes down, we need to start showing the business world that the science world has capabilities that can be of use to them." Attempts at these science and business alliances are already under way. Gordon's department at the Chubb group is one example. Sandor, who is an economist, says that his company has been "relying on scientists as consultants" for more than a year now; the researchers predict hurricanes, and forecast how the weather will affect crops. Recently, Columbia Business School_where Sandor serves as an adjunct professor_approved the formation of a new department called the Environment Finance Center to foster better communications between concerned parties. Kallos, who will head this program, says its mission is to instill the notion in business professionals that "sound economic policy needs to be backed by visionary environmental policies, as well." An example scientists cite of a public-policy issue that depends on scientific knowledge is the the use of fossil fuels and its effects on pollution and global warming. Another full-fledged alliance between the scientific and insurance communities is taking place at BBSR's Atlantic Global Change Institute. The institute is dedicated to bringing insurance and science together. Knap and two fellow oceanographers_Anthony Michaels, also of BBSR, and Mark Johnson from the University of Alaska_put together a program called the Risk Prediction Initiative (RPI). Its goal is to identify climatic trends and to make the information available to those parts of the insurance and risk- assessment community most affected by natural catastrophes. Funded by some Bermuda- and United States-based insurance and reinsurance companies, RPI organizes meetings at which executives and researchers from both communities get the opportunity to exchange information and learn "to talk to each other," Knap explains. PREDICTIVE PHYSICIST: Research consultant Richard Gordon develops sophisticated mathematical tools to help insurance companies assess risk. Indeed, one of the biggest obstacles to a smooth dialogue between the two parties has been the "crossing of the jargon barrier," Gordon contends. "Businesspeople and scientists just don't speak the same language. "On the business end, they need to understand the process of science_what peer review means, what constitutes 'good' science, and the limitations of science. Lots of business- people are very susceptible to advocacy masquerading as science." On the flip side, he says, scientists have to make an effort "to speak to businessmen objectively and without using technical jargon." At the same time, Lecomte notes, "What [insurance executives] need to do is listen very carefully to the dialogue between the scientists on both sides of the [global warming] debate. At this point we are not fully informed. Only by starting to observe the scientists' dialogue will we be able to deal with the eventual consequences of climate change."

Insurance Industry, Scientists Team Up For Mutual Benefits

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