Insurer Readiness on Long-Term Effects of Climate Change Called Into Question: Report

Insurers rank well in readiness for handling the short-term challenges of extreme weather events, but fall short in preparedness for the long-term effects of climate change, a new report says.

A report that surveyed insurers doing business in California, Washington and New York found that while many insurers are prepared to deal with today’s extreme weather events, they are not prepared for longer-term “baseline changes” driven by climate change that may lead to more potent catastrophes like Superstorm Sandy.

The report “Insurer Climate Risk Disclosure Survey: 2012 Findings & Recommendations,” commissioned by the nonprofit Ceres, gives a picture of how prepared the industry is to deal with new risks associated to climate change. Ceres drew its results on survey responses from insurers with more than $300 million in direct written premiums doing business in those three states.

“Climate really does have the potential to be a game-changer for the insurance industry, and we want to be sure it stays on their radar,” said Washington Insurance Commissioner Mike Kreidler.

Kreidler, who said “the clock is clearly ticking” on the time to act on climate change, lauded the report as a good indicator of who is working to be prepared and take action on climate change, and who is not.

“The report shows there are some strong standouts in the insurance industry, but there is room for improvement,” Kreidler said.

Jack Ehnes, CEO of California State Teachers’ Retirement System and a former insurance regulator in Colorado, noted that CalSTRS has $153 billion in investment holdings, including extensive insurance company holdings.

“The insurance industry response is well short of what we need,” Ehnes said.

“As a matter of fact you can say it’s tepid,” he said.

Geoff Margolis, deputy commissioner and special counsel in the California Department of Insurance, spoke on behalf of Commissioner Dave Jones, who he said “applauds Ceres” for undertaking the report.

Margolis said “climate risk is something that insurers and regulators need to be thinking about.”

The survey on climate risk, which was developed by the National Association of Insurance Commissioners, generated 184 responses. Ceres assessed: How the companies manage climate change issues, what drivers shape their strategies, what actions they take in their core functions or operations, and how they interact with external stakeholders.

“The implications are profound, for the insurance industry is a key driver of the national and global economies,” the report’s authors said. “If climate change undermines the financial viability of the insurance industry, it will have a devastating impact on the economy, as well.”

The report noted that 2012 was the warmest year on record in the lower 48 states and had the second-most extreme weather year in U.S. history. It called extreme weather, including stronger, more damaging storms and flooding in some areas, and drought and heat in others “the predictable consequences of rising global temperatures.”

Eleven extreme events each caused at least $1 billion in losses last year in the United States, while Superstorm Sandy caused more than $50 billion in economic losses, according to the report.

The report covered life and annuity, health and property/casualty insurers, but zeros in on the latter.

“By far, the industry segment with the most climate risk management activities underway is property and casualty — unsurprising as weather events are a major driver of losses to these companies,” the report stated.

Climate Variability vs. Climate Change

The report drew a distinction between climate variability and the long-term impact of climate change.

“While most insurers in the P/C segment have policies in place to manage climate variability, the annual and decadal variance inherent to the global climate system, few have explicit policies to identify or manage the trends of global climate change,” the report said. “Some insurers do not seem to understand the difference between climate variability and climate change.”

Climate change is global; it’s related to a growing amount of carbon in the atmosphere and the increased capacity for heat to be stored in the ocean, leading to rising sea levels, stronger storms and longer droughts that can leave more tender for massive wildfires, according to the report’s lead author, Sharlene Leurig, senior manager of the insurance program at Ceres.

“Those are baseline changes,” Leurig noted.

Especially within the health and L&A segments, but even among some P/C insurers, many companies view climate change as an environmental issue immaterial to their business, with many of the remaining companies regarding climate change as a risk that will inherently be captured in their enterprise risk management strategies, the report showed.

According to the report, only 23 of the 184 companies have “comprehensive climate change strategies,” and of those 13 are foreign-owned, while eight are property/casualty companies.

“Yet even among those companies with comprehensive climate strategies, the view of climate science is remarkably diverse,” the report stated.

The report also showed larger companies may be better prepared for the impacts of climate change. For the purpose of the report, companies were categorized by size: small (between $300 million and $1 billion annual premiums); medium ($1 and $5 billion); large ($5 billion-plus).

Insurer responses varied, with some companies seemingly more enthusiastic about dealing with the topic than others.

There are companies like The ACE Group that are funding climate change research, while companies like Swiss Re actively lend their brand to efforts at the Intergovernmental Panel on Climate Change, a global cooperative to synthesize the state of climate change science.

“Some of the world’s largest insurers have concluded that climate change is already driving extreme events to diverge significantly from historic trends,” the report stated. “Among them is Munich Re, which includes climate change among the set of factors amplifying decadal weather-related losses in North America, particularly for heat waves, droughts and thunderstorms. The increasing unpredictability of extreme events, and the potential for climate change to undermine the industry’s diversification models, threatens the industry’s long-term financial viability along with the very concept of insurability itself in some parts of the world.”

Leurig said that while the industry today may be capable of dealing with extreme weather events, the report’s findings reflect a lack of forethought about the future impacts of climate change. “What it takes to be resilient to extremes is different, the baseline is changing,” she said.