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
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
“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
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.
Compare homeowners insurance rates to find the
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,
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
“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
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.”