How Insurers Can Foil the Next Hurricane Sandy
In the 19th century, insurance companies helped drive municipal adoption of fire codes and sprinklers. In the 20th century, they pushed for seat belt laws. With the recent proliferation of extreme weather events — most recently Hurricane Sandy — some industry watchers say it’s time for insurers to once again lobby for big changes, this time to mitigate disasters tied to global climate change. Suggestions run from relocating entire neighborhoods away from the coast, to changing the selection of crops farmers grow, and simply moving electrical equipment a few floors up.
The industry clearly has financial incentive to step up; a fusillade of hurricanes, floods, wildfires, mudslides and other catastrophic events have pummeled insurer profits and made them among the first class of big businesses to acknowledge and grapple with the effects of global warming. Motivation is strongest among reinsurers, the companies on the hook if insurance companies fail under the financial crush of major disasters. Many have formed internal groups to figure out how best to address climate change. One, Swiss Re, convened the “Climate Week NYC” summit in Gotham barely one month before the city was pounded by Sandy.
But all too many insurers lack sophistication about the new prevalence of extreme weather, critics say, raising and lowering rates cyclically in reaction to loss-making events rather than through careful analysis of risk. If the industry can learn to approach climate change more systemically, as individual companies like Swiss Re have begun to do, it would have better data with which to influence policymakers. Ultimately, insurance company pressure around climate change could influence zoning decisions, building codes, and infrastructure design – nothing less than how and where people live.
“The insurance industry is more focused on this issue than probably any other business sector,” says Peyton Fleming, a spokesman for Ceres, a business group focused on environmental sustainability. “They’re the first to feel the pinch of these kinds of events … but we still don’t think they’re doing enough to improve their research and improve their modeling so the models better reflect the realities on the ground, which is more extreme weather, including events like Hurricane Sandy.”
There are some glimmers of hope. Swiss Re, for example, has been active on a New York City task force that has been studying where the city is most vulnerable to exactly the sorts of floods it was hit with. In Boston, insurers are pushing to try and help make building codes more resilient to disaster by upgrading construction standards. In Florida, along the Gulf Coast, some insurance companies have successfully experimented with incentives to encourage building owners to make their structures more storm-proof.
Ceres would like to see more of everything. Insurers could exert more pressure on local governments to, for example, plan ahead for 5-foot, 12-foot, and 15-foot storm surges. And they could also roll out more market incentives like premium discounts to encourage building owners to, for example, move electrical systems out of the basement and first floor and onto the roof.
“The unfortunate reality is insurance is very slow to react,” says David Friedberg, CEO of data-crunching crop insurer Climate Corporation. “When you have a major disaster like the year after [Hurricane] Katrina, you end up with what is known as a very hard market, which means, because we just suffered a big loss, we need to charge more. When you have a really good year, you charge less…. It’s typically too late before they are able to actually adjust” to loss-making risks.
Insurance industry action on climate change would bolster more than corporate profits; government stands to save even more over the long term, Friedberg says. The government is the reinsurer of last-resort, on the hook for billions when disaster strikes. For example, federal crop insurance could end up covering more than half of the estimated $18 billion in losses from this year’s historic drought, for example. Florida has been hit with so many hurricanes that the state government now backstops many insurance policies. If the insurance industry can more accurately price risk and discourage bad choices – growing the wrong crops, living in the wrong place – it can keep weather events from being so disastrous in the first place.
“In certain parts of the country we’re starting to see that farmers can’t grow certain crops they have attempted historically,” Friedman says. “Maybe homes shouldn’t be worth $10 million when they’re on the coast and every five years the coast will be flooded and the home will be destroyed… Look at the coastline in North Carolina… all the homes are wiped out yet again. How many times does that have to happen before we say we shouldn’t be building homes here any more?”
“At some point you’re going to have to have fundamental adjustments in economic value to account for the fact that the climate has changed.”