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September 02, 2011
Insurers Unprepared for Climate Change
    by Robert Kropp

A report from Ceres analyzes responses from insurance companies to a survey by the National Association of Insurance Commissioners, and calls for mandatory disclosure to correct failures of risk management.


Here in Vermont, inland flooding from Hurricane Irene resulted in 13 counties being declared a disaster zone. In his request for the declaration, Governor Peter Shumlin stated, "At the height of the storm's impact, there were 15 Vermont communities completely cut off by flood waters or failed infrastructure."

The estimated cost of public assistance for recovery from the storm, Shumlin continued, will be in excess of $11 million. His request also noted that Vermont has experienced a number of weather-related disasters during the past nine months.

In a press conference held yesterday to announce the publication of a new report, Sharlene Leurig, senior manager of the insurance program at Ceres and author of the report, stated, "2011 has been a painful and important reminder that changing climate will inflict damage across the US. Even before Hurricane Irene, insured losses in the US this year were 40% higher than in the entire year of 2010. "

The report, entitled Climate Risk Disclosure by Insurers: Evaluating Insurer Responses to the NAIC Climate Disclosure Survey, studies the preparedness of the insurance industry for the impacts of climate change. Its finding, Leurig said, "That insurers are concerned about climate risk but don't understand what to do about it, underscores the need for sustained engagement by regulators and shareholders."

As the basis of its analysis, Ceres used the responses of 88 insurers to the 2010 Insurer Climate Risk Disclosure Survey of the National Association of Insurance Commissioners (NAIC). At present, only six states—New York, New Jersey, California, Oregon, Pennsylvania, and Washington—require public disclosure by insurers of their responses to the survey.

"The NAIC survey, while incomplete, provides an unprecedented view into climate risk perception and management within the insurance industry," the report stated. "The survey responses paint a picture of an industry that, outside of a handful of the largest insurers, is taking only marginal steps to address an issue that poses clear threats to the industry's financial health, as well as to the availability and affordability of insurance for consumers."

"There is a consensus among insurers that climate change will drive more frequent or severe losses from extreme weather," Leurig said during the press conference. "Despite that consensus, the number of insurers with well-articulated plans to manage these impacts is disappointingly low."

The report found that only 11 of the 88 respondents have formal climate change policies in place, and more than 60% report that they have no risk management plan for assessing climate risks. Large property and reinsurance companies fared best in the survey, with several of them "investing considerable resources into understanding the risks and developing strategies that may drive more climate-resilient underwriting practices and capital decisions."

However, Leurig observed, "Among 18 property and casualty companies, none have formal climate change policies or explicit board or executive oversight of climate risk."

Furthermore, "While more than half the insurers discuss potential financial risks from climate change," Leurig continued, "Only 18% outline the way their company is adapting in capital allocation or pricing to mange those risks."

Another key finding of the report was that insurers remain overly focused on a narrow set of potential risks, such as hurricanes and earthquakes. However, as Vermont's experience indicates, "Recent years have demonstrated that the climatic effects of rising temperatures are likely driving up aggregated losses from smaller, non-modeled events—including perils such as floods, droughts, snowstorms, hailstorms and tornadoes—in ways that severely cut into insurer profitability," the report stated.

In addition to these shortcomings, "Too many insurers are modeling using historical weather data that are increasingly irrelevant to a changing climate," Leurig said.

Addressing the investment portfolios of insurance companies, Ceres cited a report issued earlier this year by Mercer, which stated, "Historic precedent is not an effective indicator of future performance." According to the report, the economic cost of climate policy could lead to as much as a 10% increase in portfolio risk in the next 20 years.

Ceres found that only a very few insurance companies integrate environmental, social, and corporate governance (ESG) factors into their investment decision-making. "Most companies view climate change as a slow-burning economic risk that will happen in time frames well in excess of their investment horizons," according to the report.

The report provided a number of recommendations to help regulators and investors assess the risk factors of climate change for the insurance sector. Most importantly, mandatory annual public disclosure of survey responses "can help other market actors identify market-wide failures in risk management and push for market corrections," the report stated.

In addition, better research into investment risks and opportunities, loss modeling incorporating climate parameters, and the temperature sensitivity of morbidity/mortality statistics would be helpful to regulators and investors, as well as to the sector itself.

Jack Ehnes, chief executive officer of the California State Teachers' Retirement System (CalSTRS), also spoke at the press conference.

"Insurance is the world's largest industry, with $23 trillion in global investments," he said. "But the insurance sector has broader importance, because of the central role it plays in the functioning of the global economy."

"Our fear is that climate change poses a fundamental threat to the long-term availability and affordability of insurance," he continued. "But despite the significant risk that climate change represents, the insurance industry's disclosure of this issue has been poor. This means that investors and regulators have been flying blind."

 

 
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