US Insurance Industry Ill-Prepared to Deal with Climate Change Risk, Impacts

Insurance companies need to prepare for climate change risksEleven extreme weather events took place in the US in 2012. Each left at least $1 billion in damages in their wake. Besides the cost in human life, Superstorm Sandy left behind some $50 billion in economic losses, along with insured losses by property & casulty (P&C) insurers in the tens of billions of dollars.

US insurance companies are well aware of the rising costs of increasingly frequent and more intense extreme weather events, as well as those associated with less sudden and intense shifts in weather patterns and climate. Yet most are ill-prepared and “only just beginning to address the effects climate change may have on their businesses,” according to a new report from Ceres, a coalition of investors, companies and public interest groups advocating from sustainability leadership.

“Climate change is potentially a serious financial threat to the insurance industry, and needs to be on insurers’ and regulators’ radar,” Washington State Insurance Commissioner Mike Kreidler, a leading advocate for stronger climate risk disclosure and action by insurance companies, was quoted in a Ceres press release. “If insurance is to remain available and affordable, companies will need to adapt. The last thing we want to see are unprepared companies simply pulling out of markets or seeking unreasonable rate hikes.”

Climate change and the US insurance industry

Insurance is vital to the smooth functioning of the economy. Extreme weather events such as Superstorm Sandy and a second consecutive year of widespread drought have big impacts on and ramifications for insurers, as do less abrupt and dramatic shifts in weather and climate.

Yet of 184 insurance company disclosures Ceres reviewed for “Insurer Climate Risk Disclosure Survery: 2012 Findings & Recommendations,”  only 23 in the property and casualty (P&C), life and annuity, and health insurance sectors of the industry have comprehensive strategies in place to deal with the impacts and effects of climate change.

“Every segment of the insurance industry faces climate risks, yet the industry’s response has been highly uneven,” Ceres president Mindy Lubber was quoted in a press release.

“The implications of this are profound because the insurance sector is a key driver of the economy. If climate change undermines the future availability of insurance products and risk management services 2012 proved to be the warmest year on record in the lower 48 US states, as well as ranking second in terms of the number of extreme weather events. in major markets throughout the US, it threatens the economy and taxpayers as well.”

Among Ceres’ key findings:

  • The quality of overall disclosure and performance by the 184 insurers was low – the average score, on a scale developed by Ceres, was 7.3 points out of a possible 50 points.
  • Of the 23 insurance companies with a comprehensive strategy to cope with climate change, 13 of those companies are foreign-owned, and eight are P&C companies.
  • Based on their climate risk disclosure responses, the industry leaders include: ACE Ltd., Munich Re, Allianz Group, Swiss Re Group, Farmers Group, The Prudential Group, Travelers Group, Hartford Insurance Group, Kaiser Foundation Health Plan and Zurich US Insurance.
  • Smaller insurance companies tend to be far less prepared to mange climate risk than larger companies.

With serious implications for both the asset and liability sides of insurer’s balance sheets, climate change impacts and effects are being felt across the entire insurance industry, not only P&C insurers. Life insurers, Ceres points out, own “hundreds of billions of dollars worth of real estate in vulnerable coastal areas.”

American taxpayers collectively are also on the line. Taxes are paying for losses sustained by the National Flood Insurance Program, as well as the rising spending on disaster relief, Ceres notes.

What to do

“As a long-term investor, CalSTRS is dedicated to making sure climate change is factored into the regular risk management practices of our portfolio companies,” Jack Ehnes, chief executive officer of the California State Teachers’ Retirement System (CalSTRS), the largest educator-only pension fund in the world and former Colorado insurance commissioner, told reporters at March 7 news conference in Boston.

“By integrating climate change risk management into their practices, insurance companies greatly improve their abilities to offer sustained shareholder value. This report gives us yet another tool as we engage with companies on climate change and other sustainability challenges.”

In its report, Ceres’ recommends insurers of all stripes do the following:

  • Treat climate change as a corporate-wide strategic issue, affecting all functions, at all levels, and formalize this in a public corporate policy statement.
  • Assess how a warming climate will alter extreme weather events, disease vectors, political risk and infrastructure resilience, and implement strategies to adapt their underwriting and investment practices accordingly.
  • Develop catastrophic models that anticipate the probable effects of climate change on extreme weather events.
  • Advocate for public policies that will help reduce carbon emissions and maintain an economy that is resilient to climate risk.

Insurance regulators need to take stronger action as well. Ceres recommends they:

  • Continue to mandate annual, public climate risk disclosure by insurers.
  • Engage with insurers, consumers and other public policy makers to better understand the nature of climate change risk, including how rates should be adjusted to reflect changing risks, and the steps insurers and regulators need to take to better incentivize consumers to reduce their vulnerability to these risks.

Image credit: David Shankbone, courtesy flickr

Andrew Burger
Andrew Burger
A product of the New York City public school system, Andrew Burger went on to study geology at the University of Colorado, Boulder, work in the wholesale money and capital markets for a major Japanese bank and earn an MBA in finance.

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