Risky Business

With $58 billion in claims to pay for last year alone, U.S. insurers are jacking rates, canceling policies, and learning to cope with climate change.

…Says Allstate CEO Edward Liddy: “We are in a period of increased land and sea surface temperatures. When you couple that with more people living along coasts and dramatically increased home values in those areas, that’s when you step back and you say, ‘Wait a minute. This is not yesterday’s game.’ ”

Publicly, insurers have not accepted the theory of global warming, which says that the accumulation of greenhouse gases – in part because of activities like burning fossil fuels – is changing weather patterns. What the industry does believe is that, for whatever reason, weather isn’t what it used to be.

Insurers are the world’s best fortunetellers. Your insurance provider can reveal more about your future than you care to know: the likelihood of your teenager’s getting into a fender-bender; the number of years a daily bran muffin can add to your life; or whether your home’s brick foundation will last another 50 years. The actuarial formulas that provide those answers are the cornerstone of the business.

Until recently, insurers were convinced that their calculations for predicting hurricane damage – known as “catastrophe models” – were accurate. But the 2004 and 2005 Atlantic hurricane seasons were off the charts: Seven of the ten most destructive storms in U.S. history occurred in those years; 2005 saw a record $58 billion in insured losses.

The 2005 season “shook insurers’ confidence in their models,” says Robert Klein, director of the Center for Risk Management and Insurance at Georgia Tech University.

Fortune