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The New York Times: Insurance Against the Future

By Dylan Walsh
The New York Times
Ten separate billion-dollar weather disasters have hit the United States this year. And in one corner of the ring, with an ice pack on its brow, is the reeling insurance industry.
The New York Times: Insurance Against the Future

In Wayne, N.J., the Passaic River has overflowed its banks four times in six months. (Photo courtesy of The Associated Press)

Ten separate billion-dollar weather disasters have hit the United States this year. And in one corner of the ring, with an ice pack on its brow, is the reeling insurance industry.

It may be time for it to re-evaluate the threats and refresh its risk-management strategy.

Erratic and severe weather events, which are expected to increase in frequency as climate change advances, challenge traditional insurance practices that analyze historical patterns to understand the probability of future risk.

“For a long time, this has been very, very effective for most property and casualty insurance companies,” said Paul Kovacs, the founder and executive director of the Institute for Catastrophic Loss Reduction, in an interview. “Companies assume that if they look at history, they can get the price right.”

But climate change throws a wrench in the works and is already wreaking havoc on balance sheets and shareholder value, according to Sharlene Leurig of the nonprofit research group Ceres. Ms. Leurig was the lead author of a report released last month that examined how the insurance industry is responding.

Titled “Climate Risk Disclosure by Insurers,” the report found that, despite a broad industry consensus on increased risks from climate change, on average only one in eight insurance companies has a formal climate change policy in place — and that such policies tend to focus narrowly on extreme coastal weather.

The devastation wrought by Hurricane Katrina in 2005 galvanized discussion of climate change among American insurers, Ms. Leurig said in an interview, but the discussion focused on hurricanes rather than the development of broadly defensive policies. “The response was essentially to stop writing business in coastal areas,” she said.

But this year a majority of losses were driven by inland storms. “That makes it a really hard puzzle to solve if you’re an insurer: how do you actually diversify risk if you might get hit by a multibillion-dollar loss just as easily in Kansas as in Florida?” Ms. Leurig said.

Although Mr. Kovacs sees this as a serious industry challenge, he is careful to point out that “climate risk is the real issue, and climate change is a context.” Just as scientists have trouble linking any specific weather disaster to climate change, the precise danger to insurance companies is unknown.

“If the question to an insurer is, ‘How many climate risks led to claims this year?’ then the answer is ‘a lot,’ ” Mr. Kovacs said. “But if you ask how many claims were paid because of climate change, the answer is not yet that many.”

Other concerns, including population shifts to riskier areas and aging infrastructure, are difficult to disentangle from climate change costs.

Nonetheless, 2010 set a new record for natural disasters in the United States, with 247 recorded, according to the Insurance Information Institute. The previous record, set in 2009, was just over 200 natural disasters.

“If we look across the U.S. and rest of world, we look at climate risk, at who’s actually going to pay the bill,” and most will be paid by the insurance industry in concert with government, Mr. Kovacs said. “This is a major public policy issue.”

In addition to presenting the possibility of more and larger payouts because of harsher weather, climate change may also clip one of the industry’s major revenue streams.

The insurance industry collectively manages $23 trillion in global investments, and according to the wealth management firm Mercer Advisors, nearly 10 percent of those assets could be seriously compromised by climate change.

While financial experts are seeking asset allocations that will be more resilient in the face of climate change, questioning the durability of investments in industries that are heavy in carbon dioxide emissions or sensitive to weather, “many insurance groups are not asking these questions at all,” Ms. Leurig said.

The Ceres report notes that liability issues present a third source of threat to the insurance industry. Mr. Kovacs said that a serious academic debate was under way over just how liable insurance companies are in the climate change context.

A 2007 article on the subject outlined some hypotheticals. Imagine that ski resorts in Colorado raised claims against power generators whose emissions contribute to global warming after snow becomes too scarce, or fishermen filed claims against industrialized nations because the warmth of oceans has caused traditional species to die off, for example. Whether insurers would be liable under these circumstances remains legally murky.

Some serious efforts to address such questions are under way within the industry. In 2005 Munich Re, one of the world’s largest insurance companies, formed the Munich Climate Insurance Initiative to enlist governments, nongovernmental organizations, scientists and industry to jointly consider how insurance can help advance solutions to climate change adaptation.

In a first-quarter letter to shareholders this year, Munich Re’s chief executive, Nikolaus von Bomhard, cited a need for “sustainable power generation,” something that the company is supporting through both investment and insurance products, for example.

In the auto insurance sector, some companies are experimenting with pay-as-you-drive policies: customers who drive fewer miles pay lower premiums. In addition to lowering risk exposure — the less you’re on the road, the less likely it is you’ll have an accident — companies are well aware of the environmental benefits.

Similarly, many companies are now offering slightly higher premiums on house insurance that allow homeowners to remodel their homes in accordance with green-building standards.

Most of the work on this problem is being done in the property and casualty insurance areas, Mr. Kovacs said.

“Property is putting a lot of resources into this area,” he added. “Frankly, I’d like to see life and health insurance doing more.”

Although public health specialists are concerned about the effects of climate change on morbidity and mortality statistics, that conversation has hardly penetrated the worlds of life or health insurance.

“Property deals with a year at a time — if they have a bad year, they raise rates,” Mr. Kovacs said. “Life and health deal with the rest of a life. If they don’t get it right at the beginning, then that creates a real problem.”

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