Insurers and Climate Change: Too Blind to See?

Insurers and Climate Change: Too Blind to See?

Insurers have been slow to embrace climate change because many don’t believe it’s a problem. Of those that do, many don’t believe it will impact the industry any time soon. 

Yet the research is there for everyone to see, including reports from the Intergovernmental Panel on Climate Change, the U.S. Global Change Research Program, and the International Alliance of Research Universities, to name a few.

More troubling is that climate scientists are warning us the impacts are happening sooner than previously anticipated, with a growing number of challenging catastrophes occuring within the next several decades. Studies released in the last year by MIT, the U.S. Global Change Research Program, Britain’s Met Centre, and the Nature Conservancy, in conjunction with several universities (PDF), all show temperature rise of as much as 8 to 10 degrees Fahrenheit by 2100 in many parts of the U.S. if nothing is done to address climate change. This will lead to a slew of disastrous side effects, such as rapidly rising seas, stronger hurricanes, severe droughts, brutal heat waves, widespread ocean acidification, pandemics, and severely damaged ecosystems.

Insurers, however, don’t have to wait until 2100 to see the effects of climate change. Opening one’s eyes and looking around currently reveals:
•    Buildings in Alaska are crumbling from softening permafrost and entire villages being relocated
•    A multi -year drought in California, Texas and other states
•    Warmer temperatures in the western U.S. have extended the wildfire season and led to more wildfires
•    A proliferation of Mountain Pine and Spruce Bark beetles caused by milder winters have destroyed 6.5 million acres of forest in the western U.S., 35 million acres in Canada, and 2.3 million acres on the Kenai Peninsula of Alaska
•    Rapidly melting glaciers around the world, such as Greenland and Antarctica

Although the results of doing nothing are truly frightening, what is required to mitigate and adapt to climate change falls squarely within a traditional risk management paradigm that insurers employ every day. 

For instance, developing a strategy for how to preserve coastal communities and structures or deciding whether some should be moved or abandoned is a classic risk management problem. Likewise, how best to encourage new technology or incentivize various behaviors is a staple of the insurance business.  So too would be a serious analysis of the effects of rising temperatures and severe droughts as well as devising new methods to deal with increased flood exposures.   

After Congress passes a climate bill, carbon accounting will become a big business. Insurers should be in a good position to advise clients about how to reduce greenhouse gas emissions and to conduct carbon footprint audits. Then insurers can develop new products to assure or maintain those emissions targets.  

While opportunities abound, many existing insurance coverages will be negatively impacted by climate change, such as professional liability, workers compensation, general liability, environmental liability, and of course, property insurance.  Without some adjustment and advanced planning insurers will discover these and other lines of insurance to be unprofitable or possibly taken over by a government-controlled risk transfer mechanism.  Such a result, without new products, will find insurers unprofitable, with declining premium and a large fixed overhead, all at the same time.   

Insurers must therefore open their eyes or face the consequences.   The National Association of Insurance Commissioners recently adopted a climate change risk disclosure policy for companies with annual premiums over $500 million. This will require disclosure of the financial risk of climate change and the actions taken to respond to those risks.  Not many insurers are prepared for such an exercise.

Nevertheless, it is a mistake to assume that other regulators are not also gearing up to thrust other responsibilities on the industry. For instance, California Assemblyman Dave Jones has introduced the “California Green Insurance Act of 2010 (PDF).”

Part 6 of the bill requires the Insurance Commissioner to “assess the insurance industry’s consumption of paper and electricity and develop industry-wide mitigation measures.” This would apply to all insurers admitted in the state. 

Despite the urging of groups like the Carbon Disclosure Project, the Business Roundtable, and Ceres, not many insurers have done this kind of analysis -- or are close to being prepared to do so.

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.

Image CC-licensed by Flickr user Anderson Mancini.