The insurance industry is ill-prepared to handle climate change-related disasters, regulators and industry watchers warned Thursday, saying the business hasn’t evolved enough in the face of rising sea levels and extreme weather fueled by climate change.
Failure to plan for the effects of climate change might challenge the stability of one of the largest sectors of the world economy, said Mindy Lubber, the president of the sustainability nonprofit organization Ceres, which authored a report that looks at insurers in three states. There were 11 extreme-weather events that each caused at least a billion dollars in losses last year in the United States. Superstorm Sandy alone caused $50 billion in economic losses.
"If climate change undermines the future availability of insurance – something we’re already seeing in places like Florida – it threatens the economy and taxpayers as well," said Lubber, whose nonprofit encourages investors, companies and public interest groups to accelerate sustainable business practices.
Regulators in California, New York and Washington state in 2012 required big insurers to disclose their climate-related risks. Ceres looked at those disclosures, which were made before Hurricane Sandy hit the Northeast last October.
Ceres found that almost all insurers have significant weaknesses in preparedness. Only 23 companies of the 184 required to make such disclosures have comprehensive climate-change strategies.
Climate change is a significant risk to insurers, warned Mike Kreidler, the Washington state insurance commissioner, who advocates for stronger climate-risk disclosure by insurance companies. There are some standouts, but his concern is that companies will pull out of high-risk markets or raise rates.
Regulators want to make sure that insurance remains available and affordable, Kreidler said in a conference call with reporters that announced the report. He and others on the call pointed to Florida, where hurricanes in 2004 and 2005 made property insurance difficult to access and costly.
"Climate really does have the potential of being a game changer for the insurance industry, and we want to make sure it stays very much on their radar," Kreidler said. "A lot of companies aren’t doing much yet, and that’s something that I think this survey is going to help to highlight, so that there is better understanding of the vulnerabilities and risks that they as an industry certainly are exposed to."
The report also found that some industry leaders are evolving to remain competitive as the impacts of climate change unfold. A study by Lawrence Berkeley National Laboratory’s Environmental Energy Technologies Division that the journal Science published in December had similar findings.
Some companies have been working with scientists to develop analytical tools to quantify and diversify their exposure to climate change risk as well as more accurately price and communicate risk. Those tools also are being used to begin adaptation and loss-prevention efforts.
The Ceres report names several industry leaders: ACE Ltd., Munich Re, Allianz Group, Swiss Re Group, Farmers Group, The Prudential Group, Travelers Group, Hartford Insurance Group, Kaiser Foundation Health Plan and Zurich US Insurance. The report calls on those companies to provide a road map for the rest of the industry as it begins to grapple with the issue.
U.S. insurers are particularly weak, said Jack Ehnes, the chief executive officer of the California State Teachers’ Retirement System, a $160 billion pension fund that invests in many insurance companies and, because of its size, can sway how the companies it invests in do business. The pension fund has $3.8 billion invested in the insurance sector, Ehnes said on the conference call.
Of the 23 insurance companies with a comprehensive strategy to cope with climate change, 13 are foreign-owned, the study found. The heated political debate over climate change in the United States affects public policy discussions about the issue.
"Europe has a longer history of dealing with public policy debate and public policies being implemented around renewables and other issues that put (climate change) front and center in front of the entire corporate community," Ehnes said.
The report calls on insurers to treat climate change as a corporate-wide strategic issue, and asks them to assess how a warming climate will alter some of their risks, including extreme weather, disease vectors, political risk and infrastructure resilience. It recommends that the companies develop catastrophic models that anticipate the effects of climate change on extreme weather events. Insurers also should advocate for public policies that would help reduce carbon emissions and maintain an economy that’s resilient to climate risk, the report found.
It recommended that regulators, which are largely at the state level, continue to mandate annual, public climate-risk disclosures by insurers. It suggested that insurers focus on how they and regulators can give consumers an incentive to reduce their vulnerability to risk.