Climate Change Presents Challenges for U.S. Insurers

IMG_2471A new report suggests that U.S. insurance companies would do well to pay greater attention to the potential effects of climate change on the insurance business.

"The report makes clear that extreme weather losses are escalating and pose enormous challenges for U.S. insurers that they should pay far more attention to," said Mindy Lubber, president of Ceres, the nonprofit advocacy group that released the report. "A small number of insurers have stepped to the plate in mobilizing a response to this global threat, but far broader engagement and action from the industry is needed."

Floods, heat waves, hailstorms, forest fires, and tornadoes made 2011 a nightmare year for U.S. insurance companies. Last year's extreme weather events contributed to net underwriting losses of $34 billion and the most credit downgrades in a single year since 2005, the year that Hurricane Katrina devastated New Orleans and much of the Gulf Coast.

This year has not been much better. The drought that has ravaged crops across the Midwest is expected to cost insurers an estimated $20 billion. The Federal Crop Insurance Corporation will bear the brunt of these costs, but more than $5 billion will be paid out by private insurers.

Climate change experts project that extreme weather events will increase in frequency and severity if carbon emissions are not significantly reduced. For example, scientists estimate that a heat wave in Texas is now 20 times more likely than it was 50 years ago.

Insurance underwriting is a precise science. Actuaries look at past events, like fires, floods and tornadoes, and predict with remarkable accuracy the likelihood of those events occurring in the future. Reasonably priced insurance premiums are essential for the continued operation of a stable economy - a company can't build a factory without insurance.

The problem that climate change poses for insurance companies is that they cannot make accurate predictions about future events if the planet ceases to behave as it has in the past. Without accurate predictions, insurers are exposed to unmanageable risk, premiums soar, and insurance becomes unavailable.

A Harvard study prepared in 2005 for Swiss Re predicts that climate change could have a devastating effect on the insurance business. More frequent extreme weather events will "overwhelm the adaptive capacities of even developed nations; large areas and sectors become uninsurable; major investments collapse; and markets crash."

"Insurance is the first line of defense against extreme weather losses, but climate change is a game-changer for the models that insurers have long relied on," said the Ceres report's author, Washington State Insurance Commissioner Mike Kreidler. "Companies will need to adapt if insurance is to remain available and affordable."

The Ceres report recommends that insurance companies improve their research and catastrophe models to more accurately reflect that latest science on extreme weather. In the long term, the report recommends that the insurance industry advocate for the adoption of legislation that accelerates the development of cleaner energy technologies and reduces carbon emissions.

Ceres also emphasizes the need for insurers to improve disclosure of climate change risks, opportunities and response strategies. Such disclosure mandates are already in place in New York, Washington and California.

Image credit: Colin Robertson

Add new comment

Filtered HTML

  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
  • Non-standard font styles will be removed, but basic text formatting like bold and italic will be preserved.

Full HTML

  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
  • Non-standard font styles will be removed, but basic text formatting like bold and italic will be preserved.

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.

FMR Icons

By submitting this form, you accept the Mollom privacy policy.