The hurricanes of the last two seasons are strong warnings of the increasing threat that climate change represents to insurers and their customers, according to a recent report by Ceres, a coalition of investors that directs the Investor Network on Climate Risk.
“Insurance, as we know it, is threatened by a perfect storm of rising weather losses, rising global temperatures, and more Americans than ever living in harm's way,” said Mindy S. Lubber, president of Ceres. “Insurers and regulators have failed to adequately plan for these escalating weather events, which scientists predict will intensify in the years ahead due to warming global temperatures.”
Although no individual hurricane can be attributed to global warming, rising global temperatures in the coming decades are likely to cause significant increases in severe weather events, such as hurricanes, floods, hailstorms, wildfires, droughts, and heat waves, the Ceres study predicts. In the past three decades, insured losses from catastrophic weather events have increased 15-fold, the report noted, losses that have far out-stripped premium increases, inflation, and population growth over the same time period.
Even before Hurricane Katrina, consumers and businesses in many parts of the country were seeing higher premiums, lowered limits, and increased restrictions in coverage due to rising weather-related losses. If climate change trends and insurance trends continue, the report's authors warn, the availability and affordability of insurance will be at an even greater risk for homeowners and businesses. State and federal governments also can expect more financial liability as private insurers further restrict coverage and withdraw from more markets.
The evidence, the report details, is spread throughout the country. Water-related mold claims in Texas resulted in mold exclusions' becoming commonplace. Last season's hurricanes in Florida prompted seven private insurers to stop writing new homeowners policies or to exit the market completely, while a new state-run insurance company, Florida's second largest insurance provider, incurred about $2.5 billion of losses from the hurricanes. In the western states, the average wildfire is twice as damaging as in the 1970s, and a new study projects that wildfire damage in parts of California will quadruple in the coming years due to warmer temperatures and stronger winds.
Even after correcting for inflation, weather-related catastrophe losses in the U.S. property and casualty sector have grown from a few billion dollars a year in the 1970s to an average of $15 billion a year in the past decade, according to the report. At the same time, weather losses are becoming more unpredictable, especially as insurers from the United States and other industrialized countries are moving into emerging markets, such as China and India, which pose additional weather risks. Lack of building codes and other factors make these markets more vulnerable to the costs and other impacts of climate change.
Despite numerous studies detailing the rising insurance risks, climate change has received little attention to date from U.S. insurers, regulators, and governments, the report's authors believe. Insurers and regulators do not have a comprehensive capacity to assess the cumulative weather-related risks from both catastrophic events and the growing number of small-scale events, they caution, while the government's full financial exposure from insurance programs, disaster relief, and other forms of weather-related assistance has never been assessed.
Insurers can take action by collecting more complete data on weather-related losses and incorporating climate modeling into their risk analyses, the study recommends. Regulators need to include climate risks in company solvency and consumer-impact analyses, review the standards of insurability to identify new challenges, and assess the exposure of insurer investments and the adequacy of capital and surplus to extreme weather events.
The government also has a role to play, the study's authors argue. Government needs to foster and participate in public-private partnership for insurance risk spreading, comprehensively assess its overall financial exposure to weather disasters, and take action to reduce greenhouse gas emissions. In addition, the government should reduce vulnerability to disaster losses through improved early warning systems, land use planning, and other measures, they said.
The report was written by Evan Mills, a scientist with the U.S. Department of Energy's Lawrence Berkeley National Laboratory; Richard Roth Jr., former chief property and casualty actuary and assistant commissioner at the California Department of Insurance, who now works with a leading U.S. actuarial consulting firm; and Eugene Lecomte, president emeritus at the Institute for Business and Home Safety in Boston.
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