insurance

Will insurers wake up to climate change?

It's reasonable to wonder if and how climate change might one day affect your home insurance.

But don't expect enlightenment from America's property and casualty insurance industry, which has remained tight-lipped on the topic thus far, at least in public.

"They're making a political decision that they don't have anything to gain by joining into the debate on climate change," says Peter Kochenburger, insurance law professor at the University of Connecticut. "Why get involved in a public debate that is going to alienate some policyholders and some regulators, no matter what you say?"

Frank Nutter, president of the Reinsurance Association of America, a Washington, D.C.-based trade group that represents global firms that insure insurance companies, says there's a perfectly valid reason why property insurers are hesitant to weigh in.

"They have no particular role relating to energy policy," he says. "They're comfortable discussing extreme weather; they just don't engage in the congressional or public debate about energy policy."

Behind the scenes, however, insurers and climate scientists have been busy trying to place two decades of catastrophic events -- from Hurricane Andrew in 1992 to the 2005 "sister" hurricanes Katrina, Rita and Wilma to the destructive 2012 outlier, Superstorm Sandy -- into a new historical context.

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A threat to the bottom line

You won't find many climate change doubters these days within the property insurance business, says David Kodama, senior director of research and policy analysis for the Property Casualty Insurers Association of America, or PCI.

"The industry has acknowledged that the severity in terms of the economic cost they're seeing is definitely increasing," he says. "That's hit their bottom lines, and they're being reminded of that by the regulatory community as well as the rating agencies that evaluate their financial strength."

The issues for insurers

But they're not quite sure what to do about their new reality. Property insurers now wrestle with a combination of issues, old and new, that together obscure a clear path ahead with regard to climate change, including:

  • Dire predictions. Industry-specific studies indicate that unless governments and insurance companies plan now, losses due to the increasing frequency and severity of climate events could overwhelm insurance reserves as well as federal and state disaster funds. "Extreme weather events are a wake-up call," says Nutter. "We need to address these problems now in order not to have more extreme experience with these events in the future."
  • Concerned regulators. The National Association of Insurance Commissioners examined the risks to the industry in a report that's now 6 years old, and has attempted to persuade all states to require that their major property and casualty insurers disclose how they're preparing for climate change. So far, only five states (California, Connecticut, Minnesota, New York and Washington) have agreed to comply.
  • Risky development. "You have more homes built in exposed areas than 50 years ago," says Kochenburger. "Because of this, you have greater exposure on the coasts or mountains to catastrophic events."
  • Storms in strange places. Who ever expected tropical storm systems, like 2012's Hurricane Isaac, to swamp the Midwest? Or torrential rains to flood Colorado? Where a decade ago, California was focused on earthquakes, today its biggest challenge is wildfires.
  • Nervous investors. Investors are putting pressure on insurance companies to address the portfolio risk of climate change. "(The investor group) Ceres has discussed this issue as a matter of corporate governance," says Kochenburger. "If an insurance company is not considering climate change, does that lead to legal liability to shareholders?"
  • Price controls. With the economic recovery still iffy, state regulators are hesitant to allow insurers to raise rates in general, much less in anticipation of a hard-to-localize threat like climate change.
  • Reserves up, earnings down. Because of the low interest rate environment, insurers are flush with cash but frustrated by meager returns on investment, Kodama says.

Not just sitting on their hands

None of this should suggest that insurers are sitting back placidly as extreme weather becomes a kind of new normal. Some insurance companies are quietly taking steps to try to reduce their exposure to issues related to climate change.

  • Dynamic storm mitigation. Insurers increasingly use advanced data analysis and catastrophic risk modeling to warn policyholders, and even deploy emergency personnel, to batten down insured homes before wildfires, floods and other extreme weather events.
  • "Moving" homes. While insurers obviously cannot move insured homes out of harm's way, they play an active role in helping planners avoid developing in unsafe areas. "We've seen that along the Mississippi River, where communities were moved or shifted," says Kodama.
  • Bundling. Allstate made headlines recently by requiring homeowners in hurricane-prone states to bundle their home and auto policies with "the good hands people." Forced bundling may become more common in response to climate change, Kochenburger says. "State regulators like to see insurers spread their risk through insuring multiple lines, so that when one line goes down, the others don't."
  • Stronger building codes. Through initiatives such as the Institute for Business and Home Safety, property insurers actively seek to strengthen building codes nationwide. "If we took just proactive steps like this, maybe we'll see 100 lives lost instead of 1,000, or $10 billion in losses instead of $20 (billion) or $30 billion," says Kodama.
  • Consumer awareness programs. The industry is posting online tips and tutorials to help homeowners brace for wildfires, floods, winter storms and other extreme weather conditions. "There are things consumers can do," says Nicole Mahrt Ganley, a spokeswoman for the Property Casualty Insurers Association of America. "Last year in California … firefighters saw firsthand that homes did not burn if there was 100 feet of clearance around the home."

Home insurance rates stay cool -- for now

So far, climate change hasn't put too much heat on home insurance premiums.

"Far from signaling a crisis, we're seeing some stability of pricing," says Kodama. That's being aided, says Nutter, by the competitive global reinsurance market, where prices are down 10 percent to 15 percent despite a horrible climatic year overseas.

While market dynamics may be working in the consumer's favor today, there's lingering concern that government, state regulators and insurers have yet to chart a coordinated course toward dealing with catastrophic natural disasters to come.

"The insurance business model is largely a retrospective one, looking at historical data and trending it forward," says Nutter. "Today, you have a conflict between the business of pricing insurance and the future. Most insurers are trying to price policies using historical data for the next year, not 15 or 20 or 50 years from now. If, in fact, the climate is changing, then the past is not prologue for the future."

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