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One Cost of Global Warming - The View from the ILS Market

The June 2017 issue of Science magazine laid out an extensive and comprehensive model for projecting the future cost of climate change for the United States of America. What the paper does not do, and which is the objective herein is to ask, what has climate change cost us so far? The paper takes one non-controversial aspect of climate change – the elevation of sea surface temperatures in the North Atlantic Ocean – and seeks to estimate costs emanating from that sole source. The lens used for this examination is the Insurance Linked Securities (ILS) market. Beginning in 2006 the ILS market began to provide expected loss estimate for different ILS under two different scenarios – that the sea surface elevation would be sustained, or alternatively, that the temperature would in time drop back to the long-term average. The difference between these two estimates essentially provides an incremental estimate of the cost of this phenomenon of climate change. The ILS market is a small, but increasingly vibrant, part of the whole catastrophe reinsurance market. The paper grosses up the ILS effects to the whole market to get a US cost of climate change. The paper concludes that it is as much as one basis point of annual US GDP growth.