Are Hurricanes Winds of Change for Insurers’ Climate Risk?

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By Abby Smith

The insurance industry faces a dilemma when it comes to climate change: fundamentally, companies understand the risk posed by natural disasters intensified by climate change, but in the near future they see relatively little risk to their business.

However, the industry faces a long-term challenge to maintain market share in areas that could become increasingly harder to insure as climate change makes natural disasters more severe and more frequent. And the Trump administration’s push to ax some of the tools insurers need to prepare for disasters could force companies to take a more public position on climate change.

“We look at it from all those perspectives, what a changing climate and environment does to either increase the frequency and severity of those kinds of events or decrease them ... and then putting that into our models to make sure we’re delivering products that are priced appropriately,” David Robinson, general counsel for the major property and casualty insurer the Hartford Group, told Bloomberg BNA.

Insurance companies are rooted in actuarial science research and analytics. Their job is to assess and comprehend risk, and that includes a scientific understanding of the effects of climate change. The federal research President Donald Trump has proposed ending is vital for insurance companies and underpins adaptation policies, such as federal flood risk standards, that help mitigate risk in areas that could become uninsurable.

If Congress were to consider adopting the Trump administration’s proposed cuts to climate science research, “my organization would be very vocal in terms of talking with appropriators about the value that these programs bring,” Frank Nutter, president of the Reinsurance Association of America, which represents major reinsurance companies such as Munich Re America and QBE Reinsurance Corp., told Bloomberg BNA.

But in the short term, insurance companies ultimately can recoup any losses by re-pricing their policies annually—meaning it isn't as urgent that they take a proactive stance on climate. And while the recent storms in Texas, Louisiana, and Florida will cost billions in total economic losses, they may not be big events for the insurance industry.

Insurance Industry Insulated from Harvey

Take Hurricane Harvey, for example.

Total economic losses from the Category 5 storm that ravaged the coastline of Texas and Louisiana late last month are estimated to range from $200 billion to $300 billion. But insured losses are expected to come in around $20 billion to $30 billion, according to estimates from AIR Worldwide—a modeling firm that specializes in catastrophic events and works closely with insurance companies.

The insurance industry is “really not going to play a big role in terms of financing the rebuilding of Harvey,” Cynthia McHale, director of insurance for the business sustainability group Ceres, told Bloomberg BNA.

But, she added, the losses are “real. They get picked up by federal, state, and municipal coffers or individuals who have homes and businesses that are damaged.”

Advocates such as McHale say many insurance companies have been “sitting on the sidelines” rather than proactively addressing climate change. The recent hurricanes may not shift the dynamic, she said.

An uptick in public conversation on climate change from the insurance industry followed Hurricane Sandy in 2012, but “it didn’t stick,” McHale said.

“I’d love to say that it will, that at this point the switch will flip, and everyone will understand climate risk needs a really concerted effort … but I’m not sure that it will at the end of the day,” she said.

For the insurance companies out in front on this issue, these storms don’t change the game.

“We are the same company after these two storms,” Louis Gritzo, vice president and manager of research for mutual insurer FM Global, told Bloomberg BNA. “We’ll continue to do the things we’ve been doing, to work with [our clients] to reduce their risk.”

Storms Could Blow Away Coverage

But the insurance industry faces risk from climate change on both sides of its balance sheet.

On the underwriting side—where insurers evaluate risk and offer coverage—the industry is seeing a “widening protection gap,” Tom Herbstein, program coordinator for ClimateWise, told Bloomberg BNA. That means economic losses attributed to climate change are increasing, but insurers’ coverage of those losses is declining.

Herbstein said his group—facilitated by the University of Cambridge Institute for Sustainability Leadership—consists of nearly 30 global insurance companies that are pushing a proactive approach to climate change that would close that protection gap.

If the gap continues to widen, areas across the country will become uninsurable, meaning companies will pull out of those markets. McHale pointed to the mid-2000s, when several major insurance companies, including State Farm and Allstate, pulled out of the Florida market following hurricanes Wilma and Rita.

“Companies can do that, but only so much. The strategy of retreat is not a winning business model,” McHale said.

But Herbstein said the widening protection gap is a medium- to long-term risk for the industry. “If the industry continues to focus on the short term … they will eventually price themselves out of the market. That’s akin to burying your head in the sand.”

Insurers Investments Under Microsope

Insurance companies also are big investors, meaning they face the risk of stranded assets as the world transitions to lower-carbon energy. According to a June 2016 report from Ceres, the top 40 U.S. insurance groups owned nearly half a trillion dollars of investments in oil and gas, coal, and electric utilities at the end of 2014.

McHale said a “bright light” is insurers are increasing investments in low-carbon infrastructure. Previewing a new Ceres survey of 16 of the largest U.S. insurers to be released in January, McHale said 70 percent of that group increased investments in infrastructure and 85 percent were considering more clean energy investments.

Over half of those surveyed by Ceres also suggested investments in renewable energy could help mitigate transition risks they face from fossil fuel investments.

While insurers rely on the scientific research the Trump administration wants to halt, some in the industry also are cheering efforts to roll back requirements that require them to disclose investments in fossil fuel companies. However, in California, which licenses 77 percent of the U.S. insurance market, Insurance Commissioner Dave Jones required just those sorts of disclosures, despite threats of lawsuits from a dozen attorneys general.

Jones’ Climate Risk Carbon Initiative, established in early 2016, required insurance companies licensed in California to divest from thermal coal and disclose investments in coal, oil, and natural gas companies and utilities that generate electricity from more than 50 percent fossil fuels.

While the Trump administration may want to “stick their head in the sand,” California will continue to play a leadership role, Jones told Bloomberg BNA. “Most other industrialized nations and their financial regulators are working on this issue,” Jones said.

Disclosure Could Drive Policy

Despite some pushback, the initiative has seen 100 percent compliance. By the numbers, that means the fossil fuel investments of around 1,300 insurance companies now are publicly available, Jones said.

For advocates such as Ceres and ClimateWise, a proactive approach from insurers is two-fold: sharing risk management expertise with the public and investing in climate resilience. And insurers leading on this issue, such as the Hartford and FM Global, already are heading in that direction.

“The key message, in addition to just making sure we understand and are tracking how hazards are changing, is there’s a lot of progress that can be made to reduce risk and build resilience to the climate that we face today,” Gritzo said. “We need to make sure that we’re really focusing on reducing that hazard and not dismissing it.”

“We face a resilience challenge in this country, a challenge we need to step up and address.”

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