Insurance Industry Unprepared For Climate Risks

Only 11 of 88 major insurers have formal policies in place to deal with growing climate change risks, according to a report issued by investor advocacy group Ceres.

Ironically, the report was supposed to be delivered during a conference of the National Association of Insurance Commissioners (NAIC) that was cancelled because of Hurricane Irene.

"Climate Risk Disclosure by Insurers: Evaluating Insurer Responses to the NAIC Climate Disclosure Survey," analyzes what 88 leading U.S. insurers are saying about climate change in public filings with state insurance commissioners – and the extent to which they’re factoring it into their business models.

It’s the first attempt to analyze insurers’ responses to a mandatory 2010 survey filed with insurance regulators in six states: New York, New Jersey, California, Oregon, Pennsylvania and Washington.

"The findings are both illuminating and disillusioning," Ceres President Mindy Lubber writes in the report’s foreword. "While the survey revealed a broad consensus among insurers that climate change will have an effect on extreme weather events, few insurers were able to articulate a coherent plan to manage the risks and opportunities associated with climate change."

"Investors – and regulators – are flying blind, without a solid sense for whether the industry is taking the steps necessary to understand and respond to this profound risk, says Jack Ehnes, CEO of the California State Teachers’ Retirement System, one of America’s largest pension funds.

"Our fear is that climate change poses a fundamental threat to the long-term availability and affordability of insurance," says Ehnes, who is also a former Colorado Insurance Commissioner. "This has tremendous implications for the economy and that is why we, as investors, are focusing so acutely on this sector."

The Insurance Landscape

Some of the largest insurers – particularly in property and reinsurance – are, in fact, investing considerable resources in understanding the risks and developing strategies for climate-resilient underwriting practices and capital decisions.

It’s the smaller players that are doing little. That’s of particular concern to regulators, because the most vulnerable companies tend to be in market segments closest to consumers.

As the report points out, climate change is altering the industry’s global business landscape and threatens to undercut the risk models on which it depends.

The industry’s financial underpinnings are threatened by rising losses in the US and globally from a wide range of perils:

• wildfires, floods, prolonged droughts and hurricanes;
• longer, more frequent heat waves and expansion of disease vectors like mosquitoes and ticks, which affect health and life insurance
• ever-increasing liability claims, including over 120 lawsuits in 2010 alone, most of them in the US.

Not Just a Coastal Concern

While the survey reveals that most insurers are focused on the coastal impacts of climate change, this year’s disasters extend far inland.

According to the National Weather Service, before a single hurricane made landfall this year, the US had already tied its annual record for billion-dollar weather disasters – the cumulative tab from floods, tornadoes and heat waves exceeded $35 billion.

The number of U.S. natural disasters has tripled during the past 20 years – 2010 broke all records with about 250. 

These trends have implications far beyond the industry’s financial viability. If insurers don’t respond in a timely way to the business impacts of climate change, the report warns, insurance availability and pricing could be affected – and with it the ability of consumers, businesses and government to productively employ capital.

Beyond that, the performance of the industry’s vast $23 trillion global investment portfolio could be compromised as well, which in turn re-amplifies the macro-economic threat.

"These developments clearly point to a business model that must change," says Sharlene Leurig, a senior manager of Ceres’ insurance program who authored the report. "The report paints a picture of an industry that, outside of a handful of the largest insurers, is taking only marginal steps to address an issue that poses clear threats to the industry’s financial health, as well as to the availability and affordability of insurance for consumers."

Read the report and its recommendations: