Are Insurers Missing the Boat on Climate Change?

Are Insurers Missing the Boat on Climate Change?

Advances in climate science in recent years have resulted in dire warnings about the consequences of a warming planet.  As we prepare for the future, it is obvious that we will have to employ every available means to reduce carbon dioxide emissions and adapt to the coming changes.

One important tool in the arsenal is insurance. Although climate change will pose a significant risk to the insurance industry, it will also produce considerable opportunities to create new products to facilitate the reduction of CO2 emissions, energy conservation, and the protection of societal assets.  At the same time, insurers can act as a conduit for promoting advanced solutions and for educating consumers and businesses about how to minimize climate change impacts.

Insurance helps society in many ways, but is particularly well-suited to promote appropriate preparation and recovery from natural disasters. With a projected increase in the number of wildfires, hurricanes, floods, and other climate-enhanced weather events, this function of insurance will be critical.   

Prior to an event, insurance assists communities by offering policy discounts that act as an incentive for prudent preparation and the use of advanced building materials and/or design.  On the other hand, once a disaster has struck, the first to arrive at the scene are often insurance adjusters, bringing money, building supplies, and other needed goods to help people cope and rebuild. In particular, the money insurers provide is vital as access to other sources of capital typically takes weeks, months or longer.  

Insurance also supports the growth of new technologies. The path to reducing CO2 emissions involves rapidly switching from fossil fuels to renewable energy and  reducing overall energy usage through conservation. Insurance can spur market acceptance of the technologies needed to achieve these goals. Individuals and businesses are much more likely to embrace alternative energy and introduce new technologies if they have protection against unforeseen events.  

With almost unlimited opportunity to play an important role in helping society deal with climate change, one would think that insurers would be fully engaged and strategizing about how to minimize the risk to their clients and to take advantage of the opportunities.

Unfortunately this is not the case.

A few European reinsurers and insurers, however, such as Swiss Re, Munich Re, Lloyds (PDF), Allianz (PDF) and Zurich Insurance Company have been engaged for a while producing thoughtful research and developing the first generation products. This has been spurred by the European Union’s advanced concern for climate change and the regulatory regime already in place there.

In the U.S., with the exception of a few market leaders, the industry is only now starting to show interest in the topic.  And, as sometimes happens, many of these companies, such as Geico, Hartford Financial Services Group and State Farm Insurance, are promoting their interest in climate change beyond their actual commitment.

As a result, the number of companies engaged in any truly meaningful way represents only a small portion of the industry.

Perhaps most surprisingly, however, is that despite a steady rise of catastrophe events and insured losses over the last decade, most insurers and reinsurers have only recently started thinking seriously about how to incorporate climate change risk into their catastrophe models

On the products front, while there is a smattering of climate change-related offerings available, none are truly novel.  Several examples of these are: premium discounts on auto insurance for drivers whose yearly mileage is below a predetermined average and for owners of hybrid cars; property coverage that allows for a “green upgrade” for autos, buildings and the machinery of manufacturing operations that have sustained damage.

In addition, a number of brokers and insurers have developed products to support carbon credits and offsets as well as to protect wind and solar energy projects. If the U.S. Congress enacts a cap-and-trade program, these products could become a significant source of new business for insurers.   

All of this is good, of course, but only scratches the surface. The average underwriter, manager, or broker knows very little about climate change issues and is not thinking about how a warming world will impact their policyholders. 

Even at a higher level, the senior management of most insurers or reinsurers would likely shrug if you asked them to evaluate the climate change exposure presented by their policyholders or from within their own operations. Although some brokers have set up consulting units to help customers measure their CO2 emissions and devise strategies for reducing it, very few brokers or insurers have made a commitment to reduce their own carbon footprint.  Nor has the greater industry as a whole shown much support for organizations that promote disclosure like the Carbon Disclosure Project or Ceres.

Furthermore, many of the difficult questions facing insurers are not being considered at all. For instance, can insurers help customers impacted by rising seas? Will insurers have to stop providing hurricane coverage in coastal areas or is there a different approach possible?  Would it be better to relocate certain coastal properties and create natural barriers?  Can insurers devise products that will support such an idea? Will the building materials of today be sufficient for the frequency and intensity of storms in the future?  Can insurers do more to encourage the adoption of energy efficient products and/or hybrid electric cars? As the country begins weaning off of fossil fuels can the industry develop products to ease the transition?

Despite being behind the curve, however, help is on the way. The National Association of Insurance Commissioners last month adopted a climate change risk disclosure policy for companies with annual premiums over $500 million. This will force insurers, for the first time to address climate change issues seriously beginning in 2010. Insurers will have to disclose the financial risk of climate change and report on the actions they are taking to respond to those risks.

This will send the industry scrambling. Ultimately, however, the pressure to make insurers devote more resources to climate change will have to come from the public. If you are a business that is currently or soon will be evaluating how climate change will impact your operations, ask your local agent or broker what they can do to help.  Such inquires will help force insurers and reinsurers to begin taking climate change more seriously.

Sandy Hauserman is an attorney and founder of Stones River Consulting, LLC.  SRC offers arbitration, expert witness and consulting services to the insurance/reinsurance industry. His practice includes evaluation of the risks and opportunities associated with environmental liability insurance, climate change, nanotechnology, e-waste, digital (cyber) risk insurance, and professional liability insurance.

"Boat" -- CC licensed by Flickr user mikebaird.