Climate Change Poses Major Threat to U.S. Insurance Industry

Report Warns of Dire Consequences Unless Industry, Government Act

Hurricane Katrina is a reminder that U.S. insurers, government and consumers are at great risk from escalating losses from hurricanes and other weather-related events, according to a report by a Boston-based investor and environmental coalition that wants the insurance industry and government to become more involved in the issue of climate change.

The report cites a 15-fold increase in insured losses from catastrophic weather events (those with over $1 billion of damages) in the past three decades–losses that have far out-stripped premium increases, inflation and population growth over the same time period and the report warns of more to come unless climate change is addressed.

While the report says that no individual hurricane can be attributed to global warming, it argues that rising global temperatures in the coming decades are likely to cause significant increases in hurricanes, floods, hailstorms, wildfires, droughts and heat waves.

Even before Hurricane Katrina, insurers were hiking premiums, lowering limits and increasing restrictions in coverage due to rising weather-related losses in Florida, Texas, California and elsewhere. If climate change and insurance trends continue, the report warns, availability and affordability of insurance will be at even greater risk. State and federal governments can also expect more financial liability as they increasingly become “insurers of last resort,” the authors contend.

“Insurance as we know it is threatened by a perfect storm of rising weather losses, rising global temperatures and more Americans than ever living in harm’s way,” said Mindy S. Lubber, president of Ceres, which commissioned the study. “Insurers and regulators have failed to adequately plan for these escalating weather events that scientists predict will intensify in the years ahead due to warming global temperatures.”

The evidence, the report maintains, is spread throughout the U.S., including:

The National Association of Insurance Commissioners was scheduled to discuss climate change at its Sept. 10-13 meeting in New Orleans. The meeting was cancelled due to Hurricane Katrina and the climate change discussion is now slated for December.

“After New Orleans, it’s becoming clearer that we are experiencing more frequent and more powerful weather events that pose huge challenges for the insurance industry,” said Tim Wagner, director of the Nebraska Department of Insurance. “This is both a coastal issue and a heartland issue. We’re seeing all kinds of extreme weather in the Great Plains, including drought, tornadoes, brushfires and severe hailstorms.”

The report notes that the number of weather-related events, the variability of total losses and the economic impacts and demographic drivers are all on the rise. Insured and total property losses ($45 billion and $107 billion globally in 2004, respectively) are rising faster than premiums, population or economic growth both globally and in the U.S. Weather-related catastrophe losses in the U.S. property/casualty sector have grown from a few billion dollars a year in the 1970s to an average of $15 billion a year in the past decade, punctuated by three peaks of over $25 billion a year and a record high in 2004 that included $30 billion in hurricane losses alone. Hurricane Katrina’s impacts could far exceed those losses. U.S. catastrophic losses have grown 10 times faster than premiums since 1971.

The situation is expected to worsen as insurers move into emerging markets such as China and India where a lack of building codes make these markets more vulnerable to the effects of climate change, according to the Ceres study.

The report cites studies predicting that rising global temperatures from higher emissions of greenhouse gases (GHG) will create additional financial burdens for insurers globally and in the U.S. The Association of British Insurers and two of the “big-three” U.S. catastrophe modelers recently stated that under a high GHG emissions scenario (where carbon dioxide levels double from today’s levels, as predicted by many leading climate models), wind-related insured losses from extreme U.S. hurricanes could jump to $100-$150 billion, an increase equivalent to two to three Hurricane Andrews in a single season. Such losses would require insurers to boost their capital requirements by 90 percent. Losses under a low-emissions scenario (carbon dioxide levels 40 percent above today’s levels) were only one-fifth those of the high emissions scenario.

Yet, the authors argue, despite these rising insurance risks, climate change has received little attention to date from U.S. insurers, regulators and governments.

The report recommends that insurers collect more complete data on weather-related losses; incorporate climate modeling into their risk analyses; and encourage policy action to reduce greenhouse gas emissions.

Regulators need to include climate risks in company solvency analysis; elevate standards for catastrophe modeling; and assess exposure of insurer investments and adequacy of capital and surplus to extreme weather events, according to the authors.

Finally, the report urges government assess the government’s overall financial exposure to weather disasters; improve the nation’s early warning systems, land use planning and other measures; and take policy action to reduce greenhouse gas emissions.

Joel Ario, Oregon Insurance Administrator and vice president of the NAIC, said insurers need to do more to assess their growing exposure from climate change. “The insurance industry plays a vital role in identifying and quantifying catastrophic risks so that appropriate loss prevention and risk-spreading measures can be put into place,” Ario said. “Reinsurers who provide a backstop on large losses are engaged on the climate issue, but much more work needs to be done by the primary insurers who consumers rely on when catastrophes hit.”

A growing number of institutional investors are pushing insurance companies to pay more attention to climate change, reports Jack Ehnes, chief executive officer at the California State Teacher’s Retirement System, one of the country’s largest pension funds. “Investors are increasingly more concerned about the financial risks posed by climate change and our interest is especially strong for an industry that is so directly exposed to the physical impacts of global warming,” Ehnes said. “Insurers must take active steps to understand and assess these daunting tasks.”

The Ceres report was written by Dr. Evan Mills, a scientist with the U.S. Department of Energy’s Lawrence Berkeley National Laboratory; Richard Roth Jr., former assistant commissioner at the California Department of Insurance; and Eugene Lecomte, president emeritus at the Institute for Business and Home Safety in Boston and 50-year veteran in the insurance industry.

Ceres is a coalition of institutional investors and environmental organizations working on climate change issues. Ceres directs more than 50 institutional investors that collectively manage over $2.7 trillion of assets.

Topics California Catastrophe Carriers USA Profit Loss Hurricane Climate Change Market