Deloitte Insurance Report Keys in on Climate Change

The potential impact of climate change on the insurance industry was important enough for consulting giant Deloitte Touche Tohmatsu Ltd. to include the topic as a significant part of its recent 2015 Property and Casualty Insurance Outlook.

The bulk of the report explores key areas such as “information fluency,” regulatory changes and capital management. A fourth major consideration is climate change.

The report acknowledges that insurers have long been on the front lines in terms of compensating for the impact of climate change by helping policyholders recover from increasingly frequent and severe weather events. However, it cites a recent study from the United Nations warning of “severe, pervasive, and irreversible” weather and climate extremes if the global community doesn’t start doing a better job containing greenhouse gasses.

“While some major European carriers have enthusiastically taken up that cause, U.S. insurers have been slow to follow, given the controversial nature of the political debate on the subject here at home,” the Deloitte report states.

This is the year that U.S. insurers are likely to become more engaged on climate change for at least three reasons, the report states: Regulatory and rating agency scrutiny into how insurers are accounting for climate change issues; the likelihood that it is better to prepare for the potential impact of climate change in case scientific warnings are indeed well founded; there is the potential for insurers to capitalize on a growing market for sustainability-related products and services.

Sam Friedman, research team leader at Deloitte’s center for financial services, the division that wrote the report, keyed in on first reason.

“Regulators are really starting to ask about this, so are rating agencies,” Friedman said.

Standard & Poor’s said last year that it is noticing more companies taking a serious look at their climate-related exposures, and S&P in turn is looking at how companies are looking at their risk and how they are managing the risk they face.

Those thinking they’ll wait until regulators actually make a move are way behind the 8-ball, Friedman said.

For an example of potential regulatory overtures on climate change one has no further to look than the National Association of Insurance Commissioners, which formed a Climate Change and Global Warming Working Group to investigate the possible effect of weather pattern changes on insurer catastrophe modeling and investment portfolios, among other things.

And pressure on the industry to not just to deal, but deal more comprehensively, with climate change risks is likely to rise due to these new demands from regulators and rating agencies, Friedman cautioned.

The report encourages insurers to capitalize on and support sustainability efforts by issuing new types of “green” insurance products that facilitate construction of more environmentally friendly buildings and retrofitting to upgrade existing facilities. It should be noted, however, that nearly one-in-five major investors in green bonds issued by one of the world’s largest players in that market is coming from the insurance industry.

“Industry efforts to quantify and limit the impact of climate change will likely proliferate over the next few years,” the report states. “Carriers can expect heightened scrutiny and more data calls from overseers evaluating how the phenomenon is being accounted for in underwriting and pricing models, reserving decisions, investment policies, and business continuity planning. These considerations could fit neatly into broader enterprise risk management transformations.”

Friedman noted that some European insurers are actively promoting energy efficiency among their employees, looking at ways to offer more data to customers, such as studies on carbon ratings to encourage better greenhouse-cutting practices, and developing new insurance solutions that may have the effect of mitigating climate change.

Efforts are underway by European insurers to set policies to cover companies that don’t meet certain mitigation standards set by the government – such policies that may pay for unanticipated retrograding, he said

Friedman was quick to say U.S. insurers have been ahead of the curve in many ways – encouraging better building codes, putting resources into more sophisticated weather modeling – but in other areas, there’s still some catching up to do.

“We think U.S. insurers could at least maybe rise to the level of their European counterparts,” he said.