As if a financial crisis didn’t give insurance companies enough to worry about, the industry now faces the challenge of figuring out its exposure to climate change, which certain investor groups say is a considerable threat to the business.
The National Association of Insurance Commissioners (NAIC) recently adopted a requirement that will require insurance companies with annual premiums of $500 million or more to disclose the financial risks they face from global warming and their actions to respond to those threats.
Under the new disclosure requirements, insurers will be forced to reveal how they are altering their risk-management and catastrophe-risk modeling in light of climate change, the steps they are taking to engage and educate policymakers and policyholders on the risks of global warming, as well as how they are altering their investment strategies.
The goal of the survey is to ensure that insurers understand the climate change threat and its potential impact to their bottom line.
While not completely resistant to it, the insurance industry is worried that regulators will use the information to adopt new mandates or force companies to change their investment strategies.
“It represents a worthy effort to raise the issue of climate change, but the survey can have undesirable consequences,” said Dave Kodama, director of policy analysis for the Property Casualty Insurers Association of America.
But others say the survey is an important and necessary development.
“This is significant because it demonstrates that there are major financial consequences to climate change,” said Andrew Logan, an insurance director at Ceres, a Boston-based nonprofit coalition of institutional investors and environmental organizations. “The goal is to tell regulators, the public and investors what the insurance industry knows about climate change and what they are doing to mange the risks associated with it.”
Logan, whose organization pushed heavily for the disclosure, said that climate change threatens the insurance industry as a whole because it increases the likelihood of insured losses and makes risk much less predictable.
“If climate change renders risk unpredictable, it calls into question whether large parts of the world are insurable,” Logan said.
According to a 2008 study by Ernst & Young, climate change is the No. 1 “strategic risk” currently facing the insurance industry, potentially more dangerous than the unstable securities markets.
In addition, the 10 most expensive catastrophes in U.S. history have all occurred within the last 20 years and hurricanes and other severe weather have cost insurers $243 billion in the last decade.
Catastrophe losses in 2008 alone reached $25.2 billion and scientists expect global warming to trigger more frequent and violent storms in the future.
“Recent events are a manifestation of climate change,” the Ernst & Young study said. “Changing weather patterns as a consequence of global warming will bring about a fundamental shift in the underlying probability of insured loss and require insurers to scrutinize their insurability criteria for certain risks.”
Logan said climate change can also impact insurer’s investments. “If insurers own stock in certain companies that are going to be forced to change the way they do business because of new climate change regulations, it could have a big influence,” Logan said.
But Kodama said that much of the science being done on climate change is still evolving and that there shouldn’t be a rush to judgment as to how it will affect insurance companies.
“We don’t want to have this information dictate how companies invest their money,” Kodama said, adding that it goes well beyond the core mission of regulators and raises concerns about publicly disclosing information that has historically been considered proprietary.
Thomas Sullivan, state insurance commissioner, voted in favor of the survey, but said he understands the industry’s concerns. The science on global warming and its impact on the industry is still not concrete, he said, adding that other sectors will be more impacted.
Reader response:
“Will you knock it off with the anthroprogenic global warming chicken little nonsense already? We are already paying a handsome social and economic premium for something that DOESN’T EXIST. The globe has actually been COOLING since 1998.
“If you wish for me to take Hartford Business with any grain of credibility, then start putting out credible news, instead of fairytale hogwash.” — L. Pusateri, Sweet Air Systems
“Having attended the Florida Hurricane Commission meeting in early 2009, it was stated by scientific experts on the Commission that there has been no change in the number of land hitting hurricanes in the US in spite of the many beliefs on Global Warming. I feel the increased intensity and frequency of predicted hurricanes by modelers falsely increases rates to citizens. Florida does a great job ensuring the model outputs are reasonable for Florida. This does not mean these models are appropriate for use by other states for rate setting. Rating Companies, State Regulators and Re-Insurance Companies need to start asking whether the predicted wind losses from predicted hurricanes correlate to a States historical hurricane past and has data from that state been used by the modeler to determine the real risk of hurricane losses? Citizens now need to take action to stop State Insurance Commissioners from approving rate hikes based on model outputs whose only credentials are they are used by Florida.” — P. Aschettino, Citizens for Homeowners Insurance ReformÂ
