The insurance industry's core business is to protect people – and businesses – in harm's way. With the rise of extreme weather across the US, insurers are increasingly connecting the dots between climate change and its costs.
The latest encouraging sign is last month's announcement that the Connecticut and Minnesota Departments of Insurance have joined their colleagues in California, New York and Washington in requiring insurers to disclose more information about climate change risks. More insurers than ever will now be asked to report on their exposure to weather-related threats and outline their strategies for managing these new risks.
When it comes to climate risks, I'm a big believer in the value of transparency. Not only will increased disclosure enable state regulators to plan for a new era of extreme weather events, but also it will force insurers to think harder about proactive responses to rising sea levels and other climate realities. We can't simply wish more damaging storms, fires and floods away; we must act.
Coastal states, such as New York and Connecticut, are clearly waking up to this fact. Both are are still rebuilding from back-to-back years of devastating hurricanes, Sandy and Irene, which caused nearly $100bn of direct damages and lost economic activity, roughly a third of it borne by private insurers. They're also seeing the government's newly revised 100-year floodplain maps showing significantly more risk exposure to future storms compared to previous maps, which hadn't been updated since 1983. About 32,000 more buildings in New York City are now considered to be at risk of flooding, a 91% jump.
Most importantly, these trends are triggering more honest discussion among insurers and regulators about appropriate price signals for property owners living in harm's way. New York and Connecticut homeowners are already seeing modest increases in private homeowners' insurance premiums and even bigger jumps in hurricane and wind-damage deductibles. There's also been renewed discussion about the National Flood Insurance Program (NFIP), which is mired in billions of debt due to a widening chasm between loss claims and premiums for the 5.5 million American homeowners and small businesses using the program. Last year's Congressional reforms to NFIP, requiring premium increases of about 25% a year over the next five years, are a welcome step.
But the fact remains that the US insurance industry is still paying only minimal attention to climate change, and even when they're acting, they're taking baby steps when big ones are needed. A Ceres analysis released in March showed that only 23 of 184 US insurers had comprehensive climate change strategies. More than half of these were foreign-owned.
It is also telling that 45 out of 50 state insurance commissioners – including all inland states, except Minnesota – are still not requiring insurers to provide climate risk disclosure. Given escalating climate-related losses far away from our coastlines, such as more costly wildfire, drought and crop losses, this is unfortunate.
It is encouraging that more US insurance executives are talking publicly about growing weather risks, but they're still refraining from linking it to the climate. Instead, it's mostly the European reinsurers who are meeting with Congress and talking to the media on the urgency of climate change. As Swiss Re Americas CEO J Eric Smith, told Time magazine last month, "What keeps us up at night is climate change. We see the long-term effect of climate change on society, and it really frightens us."
Reactive strategies where private insurers cut and run from high-risk areas, leaving consumers and local governments in the lurch, are not a satisfactory response. We've seen this already in many parts of the country, especially Florida where private insurers have largely abandoned the homeowners insurance market, thus forcing the state to take on the responsibility (and the huge financial exposure in the event of a big hurricane.)
Regulators and policymakers have also been overly reactive. Too often state insurance regulators balk at approving premium hikes that accurately reflect a property's true exposure to extreme weather events. The same can be said for Capitol Hill lawmakers, who are pushing now to delay increases in federal flood insurance premiums for a year, despite the program's $20bn-plus deficit. The House of Representatives supported such an amendment earlier this summer.
Proactive, bold leadership from US insurers is what we need, and it can come in many forms. Insurers must update their risk models to plan for future weather, not the storms of the past. With that information in hand, they should work more closely with regulators to set the right price signals that balance risks and consumer needs. Insurers can help communities plan for a warmer future – via stronger land use planning and building codes and by offering insurance products that incentivise climate-resiliency. And, lastly, the insurance industry needs to support policies to curb the carbon pollution that is causing climate change in the first place.
Just as the insurance industry helped to improve auto safety by backing seat belt laws and fire security with strict smoke detector codes, it has a huge opportunity to help address the threat of climate change. And it is in the industry's best interests to take it on.