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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 from Ceres.

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 loss events."

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," Lubber said.

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."


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