Hurricane Sandy was a wake-up call for cities everywhere about the risks of unprecedented storms.
With more than 1 million insurance claims filed in New York and New Jersey, rebuilding is far from complete. This shines a spotlight on the huge role property and casualty insurance companies can play to reduce these extreme weather risks and the costs of rebuilding.
To get a sense of how insurers are responding to climate concerns, I looked at Securities and Exchange Commission filings and sustainability reporting by Chubb and Travelers, two of the largest U.S. property and casualty insurers, to see if they thought climate change posed materials risks.
While these insurers are working to address sustainability issues, they need to boost their efforts to address climate risks and take a cue from insurers such as ACE, which is leading the charge.
The nature of insurers
The very nature of insurers -- to assess risk -- will grow increasingly difficult due to climate change's effects on weather. Insurers faced global losses from catastrophes of around $50 billion annually in recent years, noted Lara Mowery of reinsurer Guy Carpenter. As a result, insurers need to adjust their business plans, she said: "Over time, this has involved and will continue to involve capital at risk. We can't just keep putting more money in the path of what's happening."
Companies such as Chubb and Travelers should be commended for starting sustainability programs. Both have responded to the Carbon Disclosure Project (CDP) questionnaire for at least six years, although neither produces a sustainability report. Travelers has been named to the Dow Jones Sustainability Index for seven straight years, and is one of six insurers out of 140 companies in the index.
I spoke to representatives at each company. Chubb had no comment on this column. Patrick Linehan, vice president of corporate communications at Travelers, discussed the company's recognition by the Dow Jones Sustainability Index and its climate reporting in SEC filings, to CDP, and in the National Association of Insurance Commissioners' insurer climate risk disclosure survey.
In their SEC 10-K filings, neither company explains the specific climate risks they face. They do not quantify risks nor discuss the timeframe when they could occur.
Chubb said that some risks exist but could not predict their impact. "We cannot predict the impact that changing climate conditions, if any, will have on our results of operations or our financial condition."
Travelers discussed the increasing risks it faces from hurricanes and other weather events. It mentioned potential risks, such as increased frequency of claims due to severe weather conditions, as well as its catastrophe models. "Changes in climate conditions could cause our underlying modeling data to be less predictive, thus limiting our ability to effectively evaluate and manage catastrophe risk," the company said.
In their CDP responses, the companies discussed the physical risks of climate change, such as changes in precipitation extremes, droughts, snow, ice and other effects.
But both Chubb and Travelers called the timeframe of these risks, their likelihood and their magnitude of impact "unknown."
ACE leads the way
It's easy to find insurers who tell investors more about these risks.
The ACE group, a property and casualty insurer, report on three imminent risks: changes in precipitation extremes and droughts, changes in precipitation patterns, and hurricanes and typhoons. ACE said that each is "more likely than not" to have a "medium-high" impact on the company within one to five years.
ACE even characterized how precipitation extremes and droughts could particularly affect it.
"The areas exposed are property and crop coverage, which collectively comprise approximately 40 percent of our gross written premium annually," ACE said. "The risk is that actual losses in a given year may exceed the underlying underwriting and actuarial assumptions used to price products, thereby eroding profitability and, in extreme instances, shareholder capital."
Chubb and Travelers could do more to help reduce the future impacts from storms such as Sandy. A 2013 Ceres report includes recommendations for insurers to better manage climate change. They should, for example, treat climate change as a companywide strategic issue that affects all functions at all levels. Firms should formalize this in a public corporate policy statement.
Companies also should evaluate the potential for changes in future risk exposure due to climate change, such as supporting climate-related research and developing catastrophe models that anticipate the probable effects of climate change on extreme weather events.
ACE's voluntary reporting shows how it's incorporating climate change into its catastrophe models and risk management.
"ACE's risk management modeling and underwriting practices continue to adapt to the developing risk exposures attributed to climate change," the company said. "For example, since the earth's climate appears to be changing in ways inconsistent with the historical record upon which catastrophe models draw data, ACE has adopted a shorter-term view of event frequency that is higher than long-term historical frequency."
ACE's risk assessment process also factors in the potential impacts on its facilities and operations.
"Although minimal, the direct risk to ACE's business operations exists if such weather events occur in regions and cities in which ACE has offices," ACE said. "The company has developed a business continuity program to respond to any incident that may disrupt business operations."
By contrast, Chubb and Travelers do not explain how climate change is incorporated into their modeling and risk management work.
It's time for U.S. insurers such as Chubb and Travelers to redouble their efforts to address climate risks.
Hurricane image by Guido Amrein, Switzerland via Shutterstock.