U.S. insurers, regulators urged to prepare for climate change: Ceres

Almost half of the United States insurers taking part in a Ceres survey say the effect of current extreme weather events on operations, revenue and profitability is a motivator of action on climate change.

“The exposure of the company’s operations, revenue and profitability, is a motivator for 110 out of 184 companies, although this is primarily due to concern for current extreme weather events, rather than climate change per se,” notes Insurer Climate Risk Disclosure Survey: 2012 Findings & Recommendations.

Based on 184 company disclosures from a climate risk survey developed by insurance regulators, the report involved insurers licensed to operate in California, New York and Washington that require climate risk disclosure.

Among the other main motivators of action on climate change:

• 88 of the companies viewed climate change as a potential future loss driver, despite recent scientific assessments emphasizing that climate change is already amplifying extreme events that lead to insured losses;
• 72 companies cited client exposure to climate change, including clients’ exposure to carbon regulation, extreme weather damage to clients’ physical operations or assets and damage to clients’ investments; and
• Nine companies cited reputational benefits of acting on climate change, but 77 highlight correlations between sustainability programs and reputational benefits.

Ceres reports the quality of overall disclosure and performance by the 184 insurers was low – on a scale developed by Ceres, the average score was 7.3 points out a possible 50 points.

Despite insurers acknowledging that extreme weather has become the new normal, results indicate only 23 companies in the property and casualty (P&C), life and annuity and health insurance sectors have comprehensive climate change strategies. Of the 23, 13 are foreign-owned firms and eight are P&C companies.

Many in the industry are only just beginning to think about how to address the effects climate change may have on their businesses, notes Ceres.

It reports that P&C insurers, including multi-line, demonstrate far more advanced understanding of the theoretical risks that climate change poses to their businesses. In addition, these insurers tend to be at a further stage of development in implementing the tools needed to manage climate change risks compared to both the life and annuity and health segments.

In the report forward, Ceres president Mindy Lubber points out that the insurance sector is a key driver of the economy. “If climate change undermines the future availability of insurance products and risk management services in major markets throughout the U.S., it threatens the economy and taxpayers as well,” Lubber notes.

Ceres reports some leading insurers and reinsurers are promoting new products and policies to help reduce carbon pollution, while others are focused on building stronger resiliency to climate impacts, especially sea level rise, stronger storms and extreme precipitation events.

“Just as the insurance industry asserted leadership to minimize building fire and earthquake risks in the 20th century, the industry has a huge opportunity today to lead in tackling climate change risks,” Lubber adds.

Mike Kreidler, insurance commissioner for Washington State, emphasizes that if insurance is to remain available and affordable, companies will need to adapt. “The last thing we want to see are unprepared companies simply pulling out of markets or seeking unreasonable rate hikes,” Kreidler says a Ceres statement.

The U.S. witnessed 11 extreme weather events last year, each of which caused at least US$1 billion in losses, Ceres notes. “The tendency for companies to plan to the short-term compromises their ability to cope with the dramatic changes projected to occur in the coming decades, including sea level rise, extreme wildfire, more persistent drought and more severe heat waves.”

Among other things, it is recommended insurance companies do the following:

• treat climate change as a corporate-wide strategic issue that affects all functions, and formalize this in a public corporate policy statement;
• assess how a warming climate will alter extreme weather events, disease vectors, political risk and infrastructure resilience, and implement strategies to adapt underwriting and investment practices accordingly; and
• develop catastrophic models that anticipate the probable effects of climate change on extreme weather events.

Insurance regulators, for their parts, should continue to mandate annual, public climate risk disclosure by insurers, and engage with insurers, consumers and other public policy makers to better understand the nature of climate change risk, including how rates should be adjusted to reflect changing risks and how to better incentivize consumers to reduce their vulnerability to these risks.