The insurance industry exists to provide a first line of defense against disasters, but so far the industry’s response to climate change-related risks has been more fearful than forceful.
An extensive new report found that out of 330 insurers, only nine merited top ratings when it comes to climate policies — only two of which are American companies, Prudential and The Hartford. Using insurers’ responses to a climate risk survey by the National Association of Insurance Commissioners, the report by environmental non-profit Ceres, found that barely 10 percent of the insurers’ surveyed had issued public climate risk management statements that explain the risks and implications of climate change to their businesses.
The combined effects of increasing urbanization and climate change are driving higher annual losses from natural catastrophes, according to the report. Over the past three decades, annual losses from natural catastrophes have continued to increase while the insured portion has declined, leaving governments, businesses and individuals to absorb a bigger share.
In 2013, insurance covered less than a third of the $116 billion in global losses from weather-related disasters, according to data from the reinsurer Swiss Re. “In the long run,” the Ceres report says, “these coverage retreats transfer growing risks to public institutions and local populations, and reduce the resiliency of communities, which are less able to finance post-disaster recoveries.”
The 330 respondents to the survey represent 87 percent of the nation’s insurance market, and in 2012 they collected a combined $989 billion in premiums. One of the reasons insurers are hesitant to take on climate risks is the growing threat of litigation — a situation other industries also find themselves exposed to. According to a 2011 United Nations report, in a single year the world’s 3,000 largest public companies were causing an estimated $1.5 trillion of environmental damage directly due to GHG emissions. According to the report, this is damage for which major emitters of GHGs, along with local, state and federal governments, are already being held legally accountable.
For instance, earlier this year Farmers Insurance filed nine class-action lawsuits arguing that local governments in the Chicago area are aware that climate change is leading to heavier rainfall but are failing to prepare accordingly. The suits allege that the localities did not do enough to prepare sewers and stormwater drains in the area during a two-day downpour last April.
The suit was withdrawn shortly after it was filed due to the “sheer size and complexity” of the case, however Farmers felt it had accomplished its goal of bringing attention to the issue. “We believe our lawsuit brought important issues to the attention of the respective cities and counties, and that our policyholders’ interests will be protected by the local governments going forward,” said a Farmers spokesman in a statement.
According to the Ceres report, there are likely to be more claims of climate liability in the future.
The bottom line — we can anticipate growing uncertainty, increasing the complexity, and a wide variety of coverage-related legal questions related to climate change confronting insurers, policyholders and other stakeholders. Lawsuits are an inevitable part of the American system for determining whether and how to compensate for damages, and the larger the alleged injuries from climate change, the greater the recovery efforts will be.
“There’s a huge reluctance to even use the word climate change,” study author Cynthia McHale, insurance program director at the Boston-based nonprofit Ceres, told the New York Times. “Insurance companies did not underwrite or price for climate liability. So their lawyers advise them not to talk about it and not to use the word.”
Insurance industries can’t just ignore the risks of climate change or stop writing policies that may be vulnerable to climate impacts. This would put them out of business. This is where government regulators and policymakers are needed. If insurers cant align their premiums with the risk — then the risks are probably not worth it. For example, a recent study found that more than 6.5 million homes along the U.S. Atlantic and Gulf coasts are at risk of storm surge inundation, representing nearly $1.5 trillion in total potential reconstruction costs. The report, by CoreLogic, a global property information company, states that “this exposure could constitute significant risk for homeowners and financial services companies, as many at-risk homes lack protection from insurance coverage.”
So perhaps people shouldn’t be building in areas especially at risk from sea level rise and storm surges. The insurance industry could help facilitate this change by issuing corporate climate policies, accounting for climate risk in their methodologies, and evaluating climate risks and opportunities in their portfolios. As it stands, the National Flood Insurance Program (NFIP), which is overseen by FEMA, insures many flood-zone residents. When they can’t cover the costs, they look to taxpayers. Starting with Hurricane Katrina in 2005 and building up to Hurricane Sandy, which came a few months after the reforms, NFIP found itself completely fiscally insolvent, exhausting the premium-funded resources of FEMA and requiring around $28 billion in taxpayer-funded bailouts.
“The view of the industry is that there is not risk-adequate pricing in those areas, and that’s why the government is the primary insurer there,” Munich Re America CEO Tony Kuczinski said in a press conference call. “If rates were allowed to move in a direction that’s more accurate, it would encourage behavior change.”
David Kodama, senior director for research and policy analysis for the Property Casualty Insurers Association of America, told the Insurance Journal that he considers the report too negative.
“I think it’s unfortunate that it takes such a 90-percent-of-the-glass-empty approach,” he said. “I do believe there is significant common ground that we can advocate on to raise our climate change consciousness level across the nation. We don’t try to avoid this conversation at all. The report makes it seem like don’t want to engage, but we do.”