Reinsurance Group Head Puts Science in Climate Change Discussion

January 7, 2016 by

Asked for his thoughts on climate change, Frank Nutter expeditiously turned to science.

His sphere of influence is far-ranging as president of the Reinsurance Association of America, a position he’s held since 1991. Nutter has addressed the topic of climate change with everyone from association members to reporters to Senate committees.

The focus of his message doesn’t really deviate.

“Our industry is science based,” Nutter said. “The actuarial sciences, and in this case the natural sciences.”

Expanding on that point, he said it’s “critical that the industry be knowledgeable about developments from the science community that reflect increasing knowledge about climate and weather.”

Nutter’s tone and words make it clear he doesn’t believe climate change should be considered a political matter.

But as an industry advocate he’s often thrust into the political arena. He routinely calls for federal incentives to improve building codes and land use planning at state and local levels, steps he said will help the world prepare for increasingly frequent severe storms that many scientists believe will be caused by global warming.

He and the RAA also engage in a constant push to get the the government to lend its expertise to improve forecasting.

“We have called for better funding for NOAA and NASA so that the information flow about climate and weather is improved,” he said. “We have engaged in, and in fact are currently engaged in projects with NOAA to look at the impact that climate may be having on extreme events such as convective storms.”

Amassing knowledge is a key function for the reinsurers group. The association stages a catastrophe modeling conference every year in February where climate becomes a central topic.

The upcoming conference, “Cat Risk Management 2016: Pragmatic Decisions — Imprecise Data,” runs Feb. 16 through Feb. 18 in Orlando Fla. More than 500 people, many from the cat modeling field, each year come together to discuss developments in science related to climate and weather.

Among the fun session titles on tap at this year’s data-driven conference – “Assessing ‘Gray Swan’ Tropical Cyclone Events in Catastrophe Models;” “Distance Dependent Correlation in Earthquake Loss Simulation;” “Terrorism in a Changing World: 3D Blast Modelling in an Urban Environment” – is one called “NOAA/(Re)Insurance Update – Severe Convective Storm (SCS) Pilot Project: Big Data Companies, Cloud Computing, What’s Next?”

In that session three top brass NOAA officials will discuss information sharing between NOAA and the industry, and highlight examples of NOAA’s efforts to make data and tools available to the insurance and reinsurance community.

Another session is titled “Climate Change Risks: State of Understanding, Data Needs, and Barriers to Capturing These Risks with Insurance Products.” It will explore industry perspectives on the role of insurance in addressing near-term and long-term climate change risks.

Nutter has no qualms about making his thoughts on climate change clear, and he despite his feelings about politics and climate change he doesn’t back away from political arguments.

Ask him enough times about the topic of climate change, and Nutter turns to his other favorite, highly political, topic: privatizing flood insurance.

He and the association have steadfastly called for risk-based rates in the National Flood Insurance Program.

Nutter believes this will clear the way for the development of a private market that reflects climate and weather risk, and ensure that the flood program is not subsidizing further development in high risk areas.

“The strategy here is to make certain that you have sustainable communities where people do buy insurance and therefore insurance companies buy reinsurance,” Nutter said. “The flood program, we think, has in fact been a disincentive to responsible development in coastal areas.”

Nutter sees the tie-in between flood insurance and climate change as an obvious one. Sea level rise and precipitation related to climate “is a huge problem in this country and in other countries,” he said.

“The tension within the industry is that the reinsurance market would very much like to underwrite and take on flood risk to find ways to supplement the National Flood Insurance Program, to find ways for the flood program to buy reinsurance, to find ways to depopulate the flood insurance program so that insurance companies that wrote flood and the reinsurance market had that opportunity,” Nutter said.

But, he added, insurance companies are “mixed in their feelings” about taking on the flood risk. There exists a healthy dose of skepticism from the insurance community that state insurance departments will give them adequate risk-based rates to insure for flooding, Nutter said.

“We currently are in a period where there is this dynamic tension – I don’t necessarily mean that in a negative way – between the reinsurers who want to write flood risk and the insurers that, for the most part, are not interested in writing the flood risk, at least under the circumstances they write homeowners risk,” he said.

Dealing with differences in opinion are a way of life for heads of trade associations, and Nutter’s job is at the very least no different. His dealings go beyond U.S. borders, as a great number of reinsurers are based in Europe.

Like others who know the space well, Nutter acknowledged the sizable expanse that lay between the way the U.S. insurance and reinsurance industry views climate change and how their European counterparts see it.

“They tend to see it different ways,” he said. “The insurance companies in the United States, for the most part, believe that if there is climate change, or to the extent that there is climate change, that it will show up in their loss experience and therefore be trended forward – keeping in mind that the business model of insurance is largely a retrospective one. They look at loss development and then they trend it forward. They base their rates and their coverages on that.”

European reinsurers like Munich Re, Swiss Re, Zurich and Allianz are highly vocal about their views on climate change.

Those reinsurers, Nutter said, “have all been much more proactive in believing that, as have we, the RAA, for that matter, that you really ought to have a more forward-looking strategy to rely upon the actuarial sciences and the databases, of course, but to be more forward-looking about what the science is saying about future developments related to sea level rise, storm surge, more intense hurricanes, more intense precipitation events.”

Nutter believes that forward‑looking strategy will be enable those companies to be better positioned to underwrite and provide coverages.

“There is a clear divide between what largely are European-based companies and the U.S. companies in how they perceive climate change,” he added.

Somewhere in that divide lies political dissonance that often infiltrates climate change discussions in the U.S.

The political system is gridlocked over climate change, Nutter said.

“The term climate change connotes energy policy for a lot of members of Congress in particular,” he said. “Therefore, they are disinclined to embrace the science, even if you’re talking about adaptation, not just dealing with carbon. The frustration has been that even things that we believe would be sound public policy get colored in the context of that discussion – adequate risk-based rates in the flood insurance program, federal incentives for better building codes.”

He added: “Those kinds of things get colored by a discussion in the political world about climate change, when in fact we ought to be dealing with the consequences of climate change and be more proactive about it.”

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