Climate Change and Insurance Risks
A new study related to climate change moves the debate from the science of it all to its impact on the economy.
The report— “Insurer Climate Risk Disclosure Survey,” by Ceres, a nonprofit group advocating for sustainability leadership—takes a look at how not including the risks associated with climate change may affect the business of insurance companies.
“The insurance sector is a key driver to our overall economy,” said Mindy Lubber, president of Ceres.
The report comes on the heels of one of the worst years ever for extreme weather events. Lubber said insurers experienced $58 billion in losses related to things such as superstorm Sandy and droughts in the lower 48 states.
Only three states—California, New York and Washington—require insurers to disclose climate-related risks, and they were the states included in the survey.
“The climate really does have the potential to be a game changer for the industry,” said Washington Insurance Commissioner Mike Kreidler. “Climate change is a big risk to insurers, their stockholders and policyholders. We need to make sure companies are thinking strategically, doing company-wide planning, and the clock is clearly ticking.”
The survey found that nearly all the responding companies—there were 184 overall—showed significant weaknesses in their preparedness to address the effects climate change may have on their business. Only 23 companies have a comprehensive climate change strategy, and 13 of those are foreign-owned, the report found. Some companies, the report said, expressed ambivalence about the existence of climate change and what is causing it.
“An underlying issue,” Kreidler said, “is that decades of underwriting practices conducted by the insurance industry are threatened right now because we are exposed to change and historical evidence is not going to be the guiding mark for what we can expect in the future.
“Companies really do need to be prepared.”
A major concern is that insurance be available and affordable in all areas of the country.
“The last thing we want to see are companies pulling out of markets or raising their rates to sky-high levels and that having a very dramatic impact on the consumer,” Kreidler said.
That happened in Florida when private insurers pulled up stakes after a spate of hurricanes, and is happening on the East Coast as property owners face higher deductibles and premiums following superstorm Sandy, said Jack Ehnes, CEO of CalSTRS, the California State Teachers' Retirement System, and a former state insurance regulator in Colorado.
He’s concerned about the viability of the industry because of the impact it could have on the CalSTRS investment portfolio.
“Insurance is the world’s largest industry with $23 trillion in global investments,” he said. “By sheer size, it’s vitally important to any large institutional investor like ourselves.”
The CalSTRS portfolio includes $3.8 billion invested in the insurance industry, including $544 million in Berkshire Hathaway, $394 million in MetLife, $168 million in Travelers, $80 million in AIG and $71 million in Alliant.
“Those are real numbers that speak to influencing the success of our portfolio,” said Ehnes. “But this insurance sector is of broader importance because of the central role it plays in the functioning of our overall economy.”
Anyone who buys a house, drives a car, starts a business or provides health care needs insurance, he said.
“Insurance is essentially the oxygen that keeps our U.S. economy going,” he said. “Our fear here is that climate change poses a fundamental threat to the long-term availability and affordability of insurance.”
The problem, he said, is that the discussion and awareness of how climate change could affect the insurance industry occurs in the aftermath of a disaster, not in a strategic way.
“The daily conversations going on around this is still too insular and is still taking place in the quiet confines of the business and it’s not having adequate stakeholder engagement and public engagement over these issues so we can connect the risk management practices and the outcomes of not doing that well to the outcomes for the public,” he said.
The report from Ceres recommends state insurance commissioners mandate annual public disclosure of climate risk by insurers. In addition, Lubber said insurers can look at what policies at the state and local level can mitigate climate change as well as insurers’ losses.
“We’re seeing insurers engage at the state level on how to make sure new building codes are stronger and that communities are more prepared,” Lubber said.
The report’s co-author, Sharlene Leurig of Ceres, said in addition to state funding for disaster response and preparedness, states could allocate funding for disaster mitigation—preparing for extreme events before they occur.
Ehnes said such preparation is critical.
“The outcomes of not being prepared and not thinking long-term and not understanding risk management are going to be quite severe for the public, for the citizens, for the policyholders,” Ehnes said.
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