Underwriting and an EICy Approach to Climate Change

Floating together in a muck of alphabet soup the insurance industry, the government and the scientific community can be assured success in at least one thing amid their combined efforts to deal with climate change.

It’s not an OMG revelation, but when groups of people get together to study, label and try to fix things, we get get a whole lot more acronyms shoved into our daily language. And none of the aforementioned groups by themselves need any help spinning out more jargon.

The United Nations in its Framework Convention on Climate Change offers a glossary of climate change terms to help us all keep track: AAU (Assigned Unit Amount, that’s a Kyoto Protocol unit equal to 1 metric tonne of CO2 equivalent); AG13 (the Ad hoc Group on Article 13 was created to help governments overcome difficulties experienced in meeting their commitments under the Climate Change Convention); AOSIS (the Alliance of Small Island States, comprised of low-lying and island countries that are particularly vulnerable to rising sea levels); and GWP (Global Warming Potential).

Here’s a popular favorite: NAMAs. That stands for Nationally Appropriate Mitigation Actions.

The framework defines it thusly: “At COP 16 in Cancun in 2010, Governments decided to set up a registry to record nationally appropriate mitigation actions seeking international support, to facilitate the matching of finance, technology and capacity-building support with these actions, and to recognize other NAMAs.”

EIC. That’s one most don’t know. That’s because I just made it up. Consider me part of the solution. By the way, it’s pronounced like “ick,” to give it a catchy, climate changey, global warmingy feel.

EIC from here on out stands for a set of possible insurer responses to more frequent extreme weather events being attributed to climate change as foreseen by Ann Myhr, a senior director of knowledge resources at The Institutes.

Myhr began her career as an underwriter at St. Paul Companies, now part of Travelers. Beside her educational role she worked with the Federal Emergency Management Agency (that would be FEMA) to create the Associate in National Flood Insurance designation – or, as some insist, ANFI.

As a former underwriter, Myhr holds the opinion that underwriters may be among those in the insurance industry to see the biggest adjustments to their jobs due to climate change and the industry’s adaptation to it.

Myhr didn’t suggest any more acronyms, but she did posit that possible responses from insurers include: Excluding certain causes of loss; Increasing deductible levels on polices or certain causes of loss covered under a policies; Changing reinsurance arrangements so that more losses are shared with reinsurers. (That’s EIC in case you missed it.)

The latter suggestion could put a bit of snag in relations between insurers and reinsurers.

“That’s certainly going to affect negatively negotiations for annual treaties with reinsurers,” Myhr said.

She wasn’t aware of circumstances in which climate change is in play in recent or ongoing treaty negotiations, but she noted that insurers historically face risks and increasing losses by raising premiums, cutting risks on their books and venturing to share costs with reinsurers.

“In general, that’s sort of the process that property/casualty insurers will follow,” she said. “Based on what they anticipate what their experience is going to be going forward, that’s going to affect their negotiations going into their treaty.”

Another possible insurer response is to change deductibles from fixed prices to percentages.

If an insurer that, for example, is writing coverage for properties in a coastal area expected to experience more frequent extreme weather events and rising sea levels, the company may include a provision in the policy that the standard dollar deductible is negated in the case of wind damage.

“That allows insurers to better manage the exposure,” Myhr said.

They and their customers may view that as a better alternative than not writing any insurance in risky areas.

Then there’s the “E” possibility. Particular risks that are typically included in policies now may be altogether excluded, like flood is around the country. The most likely will be wind exclusions, which could put a number of coastal states in the same boat as states like Texas and Florida, Myhr said.

What about drought?

See related story: Drought Weakens Links in Supply Chain Metaphor

Myhr sees a drought exclusion as unlikely because it would have to be tied back to a peril under a policy.

For drought, Myhr said, the question becomes, “What was the cause of loss? Because most business income coverage is based on direct physical damage.”

Many of the ensuing questions being kicked about by climate change, new government regulation and more scientific analysis will ultimately be tackled or dealt with in some way by the underwriter community.

Underwriters will have to deal with changes in underwriting guidelines – where they can write, what sort of policies they can write, what kinds of policies provisions they can write, according to Myhr.

They’ll be tasked with new things like factoring in concerns about increased loss due to natural disasters while keeping in mind that rising ocean water temperatures can generate stronger hurricanes that exacerbate risks present due to sea level rise.

“That’s a bad combination,” she said of the high sea level/bad hurricane potential.

Underwriters calling for a more cautious approach can also expect a tad more friction with producers.

“That could potentially make it more difficult for producers to place certain types of business,” Myhr said.

What it all boils down to is that at some point, somewhere along the line some ARM, CPCU or CRM is bound to be SOL.

Email the writer: djergler@insurancejournal.com

Topics Carriers Underwriting Reinsurance Climate Change