In 2009, the National Association of Insurance Commissioners, a standard-setting and regulatory support body comprised of chief insurance regulators from all 50 states, reached a historic agreement.
Beginning in 2010, the organization announced, insurance companies would be required to disclose, to regulators and investors, "the financial risks they face from climate change, as well as actions the companies are taking to respond to those risks."
In a matter of months, that agreement fell apart.
"It got tied up a great deal in the politics," said Mike Kreidler, the insurance commissioner for the state of Washington. "For many insurance commissioners -- some are elected but most are appointed by governors, and if they came from a state where climate change was not a topic that was resonating with their supporters, well, being governors, they certainly didn't want to see their insurance commissioners getting out in front on this issue."
That might soon change. As the East Coast and large swaths of the Midwest continue to climb out of the 1,000-mile wide path of destruction left behind by this week's megastorm Sandy, which killed more than 80 people in the U.S. and resulted in what will certainly be tens of billions of dollars in damages, the industry whose business it is to absorb those losses is back in the spotlight. And many critics are suggesting that U.S. insurance companies, along with the people and businesses they insure, are failing to take seriously the risks of climate change -- a problem that could threaten the wider economy.
Industry representatives suggest such scolding is misplaced. They argue that, given 300 or more years of history, the modern insurance industry is accustomed to change, and that global warming, such that it is happening, is already being incorporated into their underwriting, year after year, decade after decade. The science of detecting actionable signs of climate change amid the noise of random weather variability is also just too undeveloped at this stage to fold into risk models, they say, and the rising costs of natural disasters are in any case more closely tied to a simpler truth: there's just a lot more people and property located within Mother Nature's corridors of destruction than there used to be.
"I think it would be a real mistake to characterize U.S. insurers as somehow being ignorant, or ignoring these issues," said Robert Hartwig, the president and chief economist with the Insurance Information Institute, an industry trade association.
"I'd have to say that the U.S. insurance industry has been somewhat ambivalent about the issue," he said in a phone call. "I think it's kind of a laissez-faire, free-market type thing. They say, 'We're going to judge risk and, by the way, we only write policies for six months or a year at at time, so we can always make adjustments in our underwriting if we perceive that we're getting into substantive change."
There's no question that an event like Sandy will have insurers adjusting their actuarial tables. Estimates on the amount of damages in the wake of this week's storm vary, but all are well into the tens of millions. The Oakland-based risk assessment firm Eqecat, which provides modeling tools for insurance clients, currently puts total economic losses on the order of $30 billion to $50 billion, and between $10 billion and $20 Billion dollars in insured losses. This does not include flood-insurance claims -- the most costly for coastal communities in New York and New Jersey -- that held with the National Flood Insurance Program, the federally subsidized underwriter that is already saddled with debt.
AIR Worldwide, another risk modeling firm, estimates that the insured losses will be somewhere between $7 billion and $15 billion.
Whatever the ultimate value, climate science suggests in broad terms that a warming planet will likely produce more muscular storms, as well as increased heat waves, droughts, higher-precipitation in some areas, and other weather events that have clear implications for the long-term viability of the insurance industry.
European re-insurers like Swiss Re and Munich Re, Kreidler suggested, are getting out in front of the issue.
Reinsurers, of course, are the backstop to the industry. They provide insurance to primary insurers as a way of dispersing risk across the market and preventing single catastrophic events like Hurricane Sandy, which swept up the East Coast and joined a cold front to become a superstorm this week, from quickly annihilating whole companies. Munich Re, one of the world's largest re-insurers, based in Germany, published a nearly 300-page analysis last month that suggested, among other things, that weather-related losses over the last 30 years were rising worldwide -- but nowhere as quickly as in the United States. The re-insurer also said that in some instances, these shifts could not be accounted for by increasing property values, population growth, or inflation -- suggesting that manmade climate change was playing a role.
"Nowhere in the world is the rising number of natural catastrophes more evident than in North America," the company stated in releasing the analysis. "The study shows a nearly quintupled number of weather-related loss events in North America for the past three decades, compared with an increase factor of 4 in Asia, 2.5 in Africa, 2 in Europe and 1.5 in South America. Anthropogenic climate change is believed to contribute to this trend."
The findings were not universally embraced -- including by many scientists, who suggest that attributing any part of these trends to mankind's influence on the climate is an intellectual leap unsupported by the evidence. A recent economic analysis that attempted to "normalize" tornado-related damages in North America over the last 60 years, for example, suggested that while 2011 was a particularly expensive year, the overall trend in damages is going down.
The Head of Munich Re’s Geo-Risks Research unit, Prof. Peter Höppe, conceded in a phone call that research into the matter was ongoing -- and that more needed to be done. But he also suggested that the broad implications of a warming planet are well understood, and that insurers ignore them at their peril.
"The insurance industry should have an interest in mitigating global warming because if we don't do that, then we may run into hardly manageable conditions in the second half of the century," Höppe said. "For the next two or three decades we cannot change anything anymore, so mitigation doesn't change anything there in a relevant way. But in the second half of the century, we still can decide in what climate the next generations are going to live and what kind of conditions we will find -- whether things will stay insurable or not. And this is definitely a risk for our business model in the long term. So it's not only because we are also humans living on this earth and most of us have children and want to give this earth to our children where they still have the same chance that we have -- this is also another motivation. But it is also a business motivation, certainly."
Hartwig, with the Insurance Information Institute, said it was well understood that a consensus had emerged among scientists that the planet is warming and that human beings are playing a role, but that climate models are nowhere near sensitive enough at this stage to provide information that would be useful to insurers now.
"Even if you concede that there are impacts of humans on the global climate, it's quite another thing altogether to be able to take that information and bring enough granularity to that information -- in other words, bring it down to the level where it could be used to price an individual insurance policy," Hartwig said. "It's one thing to say sea levels will rise, its another thing to say that, in 2012, there will be a storm that inundates lower Manhattan. There's no way in general to take information from climate models and adapt it in a way so that it is sufficiently refined to incorporate into an individual insurance policy."
Hartwig added that government subsidized property insurance, like the National Flood Insurance Program or the Citizens Property Insurance Corporation -- public entities formed to insure properties in areas where the risk was too high for the market to affordably bear -- distort the market and encourage foolish development by providing artificially low premiums that are not commensurate with the odds of future disaster.
These observations are true, most experts agree, but climate advocates suggest the commercial insurance industry is taking too narrow a view of the problem. In a report released in September, Ceres, a business sustainability consultancy based in Boston that has worked with Kreidler and insurance regulators nationwide to nudge insurance companies to pay closer attention to climate issues, suggested that the industry can do more to keep the long-term costs of extreme weather catastrophes from spiraling out of control, which would have broad implications for the nation's financial health.
"The insurance industry is a key driver of the U.S. Economy," the report, called Stormy Future for U.S. Property & Casualty Insurers: The Growing Costs and Risks of Extreme Weather Events. "Its products and actions stimulate trillions of dollars in private investment and influence business activity and building development patterns. Insurance is woven into virtually every economic activity for consumers, taxpayers and governments that are reliant on stable and sound private insurance markets. If that availability and stability are lost, governments and consumers suffer financially. In fact, there is a great need and opportunity for insurers to play an expanded role in managing climate risks and bolstering society’s resiliency to severe weather."
The industry can do that, the Ceres report suggested, in a variety of ways. These might include working more closely with the academic and scientific communities to develop new and more sophisticated risk models that look not just at past weather events, but peer forward as well. That would mean helping to advance the current effort among climate scientists to understand the likely impacts of climate change on the "frequency and severity of thunderstorms, hailstorms and tornadoes, of which little is known," the report stated. The industry could also nudge the market by offering preferential pricing to property owners who use more storm-resilient materials, for example, or promoting reductions in greenhouse gas emissions in certain sectors.
Kreidler likens it to the significant role insurance industry played in lobbying for better fire protection in buildings, or for seat-belts and airbags in cars. "These came about in no small part because insurers became very engaged in pressing this issue with legislators," said Kreidler, who is working with Ceres and insurance regulators in two other states, California and New York, to survey the extent to which climate change is factoring into thinking across the industry -- and to reanimate the idea of requiring insurance companies to publicly disclose the climate risks they face.
A form of this has recently been woven into SEC requirements for publicly traded companies by the SEC.
"This is a topic that some of us feel very keenly about, because climate change really is an insurance game changer," Kreidler said. "We can't keep going back and using historic weather patterns and believe that this is going to be a good predictor of what we'll be exposed to in the future."
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