There is today mounting evidence that human-induced climate change is increasing the frequency and intensity of extreme weather events, including heat waves, droughts, storms, and floods. According to the Intergovernmental Panel on Climate Change (IPCC), the leading international body for the assessment of climate change, it is now likely that human influences have led to a warming of daily minimum and maximum temperatures(1) and that greenhouse gas emissions have contributed to the intensification of extreme precipitation.(2) The IPCC considers it “virtually certain”(3) that increases in the frequency of both warm and cold daily temperature extremes will occur globally throughout the century and “likely”(4) that the frequency of heavy precipitation will increase in many regions and that the average maximum wind speed of typhoons and hurricanes will increase throughout the century (though possibly not in all ocean basins).(5) The panel also asserts "medium confidence” that there will be an increase in the frequency of droughts in many regions.(6)
These projected trends pose many challenges, as well as opportunities, for all companies, but for the insurance industry in particular. An increase in the frequency and intensity of weather events can mean greater economic losses linked to such events, which may result in more insurance claims. Swiss Reinsurance has estimated that whereas weather-related insurance losses in the U.S. were approximately $3 billion per year throughout the 1980s, for the past decade losses have been approximated at $20 billion per year.(7) 2011 set a record in insurance losses due to catastrophes including severe storms, flooding, hail and high wind events.(8) Crop insurers paid out a record $9.1 billion in claims due to U.S. crop damage.(9) Meanwhile, losses from droughts and wildfires in Texas during the summer of 2011 -- the hottest and driest on record for Texas -- were estimated at $5 billion.(10)
The risks associated with an increase in the frequency and intensity of extreme weather events are thus material issues for insurance companies. This is especially true for property and casualty insurers. Reinsurance companies are also particularly at risk since they provide insurance coverage to traditional insurers when they are hit with a sudden, large liability, such as after a natural disaster. Some health insurance companies have also reported concern because changes to the climate can exacerbate respiratory and cardiac conditions, increase the prevalence of insect-borne diseases and increase allergy-related illnesses.(11) It is therefore important that insurance companies are forthright with their investors about the risks associated with changing climate patterns.
Of course, as the risk of greater insurance losses mounts, some insurers may choose to exit certain markets rather than incur the additional costs that climate change brings. They may also price consumers out, whether through rate hikes, increased deductibles, reduced limits or new exclusions.(12) This has already happened on a large scale. Allstate has said that climate change has caused it to cancel or not renew new policies in many Gulf Coast states.(13) The company cut the number of homeowners’ policies in Florida from 1.2 million to 400,000, with the ultimate target being no more than 100,000. Meanwhile, State Farm, Florida’s largest insurer, stopped writing new insurance policies in the state in 2008(14) and ultimately exited the market completely after being denied a 47% average rate increase.(15) The Florida Insurance Commissioner referred to the decision as "unnecessary destabilization of the insurance market."(16) According to Ceres, a non-profit group that works with companies to address sustainability challenges, the state-run insurer in Florida is now the largest insurance carrier in the state and many states are on a similar path of shifting the risk of insurance losses to taxpayers.(17)
It is essential that insurance companies adopt detailed policies that address climate change and extreme weather events so that consumers can make prudent choices about their insurance options. This will also enable regulators to plan ahead in order to ensure access and affordability in the insurance market. In this regard, there has already been significant progress. On February 1, 2012, California Insurance Commissioner Dave Jones announced that California would join Washington State and New York in requiring all insurance companies operating in their states that write in excess of $300 million in direct written premium (comprising 90% of the insurance market) to respond to the Climate Risk Survey of the National Association of Insurance Commissioners (NAIC).(18) The survey, first established in 2009, seeks “to provide regulators with substantive information about the risks posed by climate change to insurers and the actions insurers are taking in response to their understanding of climate change risks.”(19) Commissioner Jones said, "This multi-state effort will not only seek to strengthen this survey, but also to ensure the results of the survey continue to be made public… The result should be that insurers can implement best practices, and members of the public can study the impact on consumers."(20)
Reinsurance companies are already committing significant resources to understanding the risks of climate change. Reinsurance giant Munich Re, for example, has developed the world’s most comprehensive database of natural disasters, dating back to the eruption of Mount Vesuivus in A.D. 79.(21) While encouraging, the insurance industry’s overall response to the risks posed by climate change remains shockingly inadequate. In 2011, Ceres analyzed the responses of 88 insurance companies to NAIC’s 2010 climate disclosure survey. The companies included in the analysis included diversified, multi-line insurers; property and casualty insurers; health and life insurers; and reinsurance companies. Ceres found that of the “88 companies surveyed, only 11 reported having formal climate change policies, and more than 60 percent of the respondents reported having no dedicated management approach for assessing climate risk.”(22) Of the 11 companies that reported having formal climate change policies, seven were multi-line insurers and one was a global reinsurance company, most with annual premiums well over $1 billion. Ceres found that of the 18 property and casualty insurers surveyed, none had formal climate change policies or explicit board or executive oversight of climate change-related policies.
Besides adopting comprehensive policy statements and ensuring that there are dedicated resources available for the assessment of climate risk, there are other ways in which insurance companies can lead the effort to address climate change. Insurance companies represent some of the largest investors. As such, they can adopt investment strategies that promote a clean energy future, as Munich Re and Allianz plan to do.(23) They can also innovate with products that provide coverage for clean energy projects or encourage sustainable consumer behavior. Many insurers, for example, offer discounts for green building. Insurance company Progressive offers a program called Snapshot, which rewards policyholders who drive less through a Pay-As-You-Drive (PAYD) policy.(24) Insurers can also provide many resources to their clients, such as providing information about how and where to build for a future with a heightened risk of extreme weather events.
At Pax World, we seek to invest in insurance companies that understand the risks associated with climate change and that display transparency about their approach to managing those risks. We prefer companies that are forthright about the financial risks that climate change poses on their business, and those that seek to ensure affordability and access, even as climate patterns change. We also believe that the insurance industry has a unique opportunity to demonstrate leadership on issues related to climate change, whether through helping its policyholders better understand the risks of climate change or investing in and providing coverage for clean energy projects.
(1) defined as having 66-100% probability. IPCC, 2012: Summary for Policymakers. In: Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaptation [Field, C.B., V. Barros, T.F. Stocker, D. Qin, D.J. Dokken, K.L. Ebi, M.D. Mastrandrea, K.J. Mach, G.-K. Plattner, S.K. Allen, M. Tignor, and P.M. Midgley (eds.)]. A Special Report of Working Groups I and II of the Intergovernmental Panel on Climate Change. Cambridge University Press, Cambridge, UK, and New York, NY, USA, pp. 1-19.
(2) The IPCC has “medium confidence.” The degree of confidence depends on a qualitative synthesis of an author team’s judgment, based on the validity of a finding, as determined through evaluation of evidence and agreement. IPCC. Summary for Policymakers. In: Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaptation. 2012.
(3) 99-100% probability. IPCC. Summary for Policymakers. In: Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaptation. 2012.
(4) 66-100% probability. IPCC. Summary for Policymakers. In: Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaptation. 2012.
(5) IPCC. Summary for Policymakers. In: Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaptation. 2012.
(6) IPCC. Summary for Policymakers. In: Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaptation. 2012.
(7) Ceres. Insurers See Growing Risks and Costs from Climate Change. Ceres, 1 Mar. 2012. Web. 8 Mar. 2012.
(8) State of California. California Department of Insurance. Insurance Commissioner Dave Jones Announces Multi-State Effort on Climate Risk Disclosure Survey. California Department of Insurance, 1 Feb. 2012. Web. 05 Mar. 2012.
(9) State of California. California Department of Insurance. 1 Feb. 2012.
(10) Ceres. "Insurance and Climate Change Fact Sheet." Ceres. Dec. 2011. Web. 5 Mar. 2012.
(11) Leurig, Sharlene. Climate Risk Disclosure by Insurers: Evaluating Insurer Responses to the NAIC Climate Disclosure Survey. Rep. Ceres, Sept. 2011. Web. 7 Mar. 2012.
(12) "Insurance in a Climate of Change: Availability & Affordability." Environmental Energy Technologies Division, Berkeley Lab, U.S. Department of Energy. Web. 11 Apr. 2012.
(13) Conley 2007 in "Insurance in a Climate of Change: Availability & Affordability." Berkeley Lab, U.S. Department of Energy.
(14) Garcia and Benn 2008 in "Insurance in a Climate of Change: Availability & Affordability." Berkeley Lab, U.S. Department of Energy.
(15) Hays 2009 in "Insurance in a Climate of Change: Availability & Affordability." Berkeley Lab, U.S. Department of Energy.
(16) Hays 2009 in "Insurance in a Climate of Change: Availability & Affordability." Berkeley Lab, U.S. Department of Energy.
(17) Ceres. "Insurance and Climate Change Fact Sheet." Dec. 2011.
(18) State of California. California Department of Insurance. 1 Feb. 2012.
(19) National Association of Insurance Commissioners. "Insurer Climate Risk Disclosure Survey." 28 Mar. 2010. Web. 7 Mar. 2012.
(20) State of California. California Department of Insurance. 1 Feb. 2012.
(21) Carey, John. "Storm Warnings: Extreme Weather Is a Product of Climate Change: Scientific American." Scientific American, 28 June 2011. Web. 7 Mar. 2012.
(22) Leurig, Sharlene. Climate Risk Disclosure by Insurers: Evaluating Insurer Responses to the NAIC Climate Disclosure Survey. Sept. 2011.
(23) Suess, Oliver. "Munich Re Plans to Invest in Wind, Solar Parks to Boost Returns." Bloomberg, 23 June 2011. Web. 08 Mar. 2012.
(24) "Snapshot." Snapshot, Snapshot Discount: Pay As You Drive® (PAYD) - Progressive. Progressive. Web. 08 Mar. 2012.