September 20, 2012
Insurers Unequipped to Deal with Climate Change
by Robert Kropp
A report from Ceres warns that as payouts for extreme weather events increase to record levels, the
insurance sector is falling behind other industries in returns on investment.
Scientists may be hesitant to attribute any single extreme weather event to the effects of climate
change, but they do warn that the increasing frequency of them is a sign that the effects are
already being felt. In 2011 alone, "devastating earthquakes in combination with a large number of
extreme weather events and catastrophes made 2011 the costliest year ever for natural catastrophe
losses on a global basis," leading to a record $380 billion in losses, according to a new report
To counter such
losses, businesses and homeowners traditionally look to the property and casualty insurance
industry for relief. But the Ceres report, entitled Stormy Future for U.S. Property and Casualty Insurers: The Growing Costs and
Risks of Extreme Weather Events, warns, "Rising losses related to extreme weather events are
significantly impacting the insurance industry and will increasingly challenge the sector's risk
models and underwriting capabilities."
Furthermore, the report continues, "Rising payouts
come as insurers are simultaneously confronting historically low investment returns and a sluggish
overall economy." Returns on investment for the insurance industry have lagged behind other
industries, even before the underwriting required by extreme weather events in 2011. As a result,
"The threat of rising catastrophic losses triggered by increasing concentrations of insured assets,
along with a changing global climate, present very real and significant challenges to the sector's
financial future," the report states. "These increasingly visible trends could undermine some
insurers' ability to manage and, in some cases, even survive, future catastrophic, weather-related
Mindy Lubber, president of Ceres, said, "A small number of insurers have
stepped to the plate in mobilizing a response to this global threat, but far broader engagement and
action from the industry is needed."
The report provides a number of recommendations for
insurance companies, investors and rating agencies, and regulators. Insurers must update their risk
exposure by basing it on emerging weather patterns rather than historical examples. Their
underwriting of risks must reflect the findings of updated research, and they should advocate for a
transition to a low-carbon economy to minimize the effects of climate change.
"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,"
Investors should engage with insurance companies to improve disclosure of
climate change-related risks and opportunities, and conduct analyses of management responses to
extreme weather events. Regulators should strengthen mandatory climate risk disclosure and build
climate risk considerations into the financial oversight process.
"As a long-term
investor, CalSTRS is dedicated to making sure climate change is factored into the regular risk
management practices of our portfolio companies, especially those in the insurance industry," said
Jack Ehnes, chief executive officer of the California State Teachers' Retirement System (CalSTRS). "By
integrating climate change risk management into their practices, insurance companies greatly
improve their abilities to offer sustained shareholder value."