Can the insurance industry afford what Mother Nature’s dishing out?

Colorado wildfires, Superstorm Sandy, widespread drought and dangerous tornadoes in the Midwest are among the extreme weather events that plagued the United States in the last two years, and opinions vary on whether the insurance industry is ready to deal with the costs associated with climate change.

Ceres, a Boston-based nonprofit that promotes sustainable business practices, released a report in March that found that out of 184 insurance companies surveyed, only 23 had strategies to deal with climate change. Thirteen of those 23 were foreign-owned.

“While there are some large insurance companies building climate change into their modeling for extreme events and how they charge for that, those companies are in the extreme minority,” said Sharlene Leurig, senior manager of Ceres insurance and water programs. “The majority of insurers are not really building climate change into their business strategies.”

Since 2011, extreme weather events have cost the United States about $188 billion in damages, according to a 2013 report from the Center for American Progress, a nonprofit that promotes “progressive ideas and action,” according to its website.

The National Oceanic and Atmospheric Administration (NOAA) said 2012 had the most extreme weather on record since 1910, when record-keeping began in the United States.

But Robert Hartwig, president of the Insurance Information Institute, an industry trade group in New York City, said the extreme events of the last two years have proven that U.S. insurers are prepared for catastrophic weather.

“No industry is better prepared. We’ve been thoroughly tested and have passed those tests with flying colors,” Hartwig said. “Having experienced and paid for record extreme activity in 2011 – and the second – or third-most expensive year in U.S. history in 2012, the insurance industry still emerged from 2012 with record or near-record capital on hand.”

He said he “couldn’t disagree more with the conclusion of Ceres that we’re not ready. This industry is rock-solid financially and has withstood literally everything that Mother Nature has thrown our way.”

The Ceres report summarized responses from insurers doing at least $300 million in business each in California, Washington and New York states in which insurance regulators require that insurers of that size disclose their climate-related risks.

“Because virtually every large American insurer operates in at least one of those states, this effectively opens a window into the entire industry,” Ceres said in its report.

Wildfires that caused at least $450 million in damage in Colorado last year proved that the state isn’t immune to the effects of global climate change, Leurig said.

“It’s absolutely an issue in Colorado,” she said. “We began by thinking of climate change as a coastal problem, but each year, as we see more losses from inland storms and wildfires, it becomes clear there is really no safe market.”

The Ceres report found that smaller insurance companies – those that write $300 million to $1 billion worth of annual premiums – tend to be less prepared for climate change than larger companies. Property and casualty insurers showed greater understanding than other insurance sectors of the risks that climate change poses to their business.

Many health, and life and annuity insurance providers, “view climate change as an environmental issue immaterial to their business,” the report said.

“Despite predictions of more pronounced heat waves, expansion of insect-borne disease and poorer air and water quality, few health companies describe climate change as a factor relevant to their risk assessment,” the report said.

“Aside from being a question of how insurance companies remain profitable and solvent – this is also a cautionary tale for insurance regulators who are creating policy, and for taxpayers,” Leurig said. “When you can transfer risk, disaster relief funds play a much bigger role in recovery.”

The report offered several recommendations for insurers to better prepare for climate change, including treating climate change as a corporate-wide strategic issue, supporting research on the influence of a warming climate on human systems and developing catastrophe models that anticipate the probable effects of climate change.

Leurig believes politics have played a role in the fact that U.S. companies have lagged their European counterparts in preparing for climate change, but “recent losses globally are reinvigorating the political appetite for insurers to play the role they need to play to help” in dealing with climate change.

The Insurance Information Institute’s Hartwig said insurers already have been dealing with climate change for years, “whatever the cause.”

“The fact, irrespective of the cause, is that there has been an increase in natural disasters,” Hartwig said. “It all adds up to the same dollars and cents. And insurers have adjusted to that new reality.”

Insurers have increased premium costs in many parts of the world, he said, noting that was the most obvious” thing insurers have been doing to deal with the extreme weather events.

They also have created sophisticated modeling to assign premium prices, increased their use of reinsurance companies to diversify the risk, supported stronger building codes and sensible land-use policies, and have provided discounts in some parts of the country for using appropriate building materials.

“If you have a wood shingle roof in Colorado, you’ll pay more for it than you would for a more fire-resistant roof,” Hartwig said. “We want to encourage people to make smart decisions.”

Heather Draper covers banking, finance, law and the economy for the Denver Business Journal and writes for the “Finance Etc.” blog. Phone: 303-803-9230.


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