In recent years, Mother Nature has taken a toll on the insurance industry. Superstorm Sandy cost the United States approximately $70 billion in direct damages to business owners and homeowners in the storm's path and lost economic output.
According to insurance industry estimates, Sandy was the second most expensive storm in U.S. history (after Hurricane Katrina). Most of that cost was absorbed by the United States government and the governments of impacted states. Approximately $20 to $25 billion in damages from the storm was eventually covered by large insurers and reinsurers.1
According to a just published Stanford University research report, severe thunderstorms, often accompanied by damaging rainfall, hail and tornadoes, are one of the main causes of catastrophic losses in the United States. New climate models suggest a robust increase in these types of storms across the country.2
Since 1968, the federal government's National Flood Insurance Program has taken the brunt of responsibility for insuring communities most at risk from flooding. As a consequence, homeowners who continue to live in areas that are likely to be hit by hurricanes and floods know that much of the cost of rebuilding will be absorbed by Federal Emergency Management Agency (FEMA) flood insurance and/or paid for by federal and/or state governments, in other words by taxpayers.
Those in the coastal regions are not the only ones to suffer at the hands of Mother Nature. Wildfires and droughts have occurred with regularity in the far west in recent years. Millions of Americans recently experienced a prolonged, severe heat wave from the far west, where widespread fires were triggered by dry conditions, through the Midwest and across the East and Southeast regions of the nation. Some of those wildfires are still raging in Idyllwild, CA, and in western Colorado.3 Also, who can forget this year's string of tornadoes in America's heartland, particularly in Oklahoma, that resulted in loss of lives as well as tremendous damage to homes and businesses?
Major flooding in Central Europe during the first half of July 2013, which killed at least 23 people, resulted in combined economic losses of up to $22 billion and insured losses tentatively estimated at $5.3 billion, according to the latest edition of the Global Catastrophe Recap issued by Impact Forecasting, the catastrophe model development center at Aon Benfield.4
Insurance & Reinsurance Companies in Jeopardy
Few industries would appear to face a greater threat from the effects of climate change than the insurance industry. As flood waters rise, heat waves and droughts spread, and hurricanes and tornados intensify, trillions of dollars of insured assets are at risk. In the worst-case scenario, the best-managed, most solvent and even the largest insurance carriers are at increased risk of insolvency from the overwhelming catastrophe claims.
While it is believed that the insurance industry is well equipped to help the world prepare for and recover from the perils caused by climate change, top executives from the best-capitalized insurance and reinsurance companies recognize that climate change is real and puts those companies in great jeopardy. Each year, the losses seem to grow exponentially and analysts point the finger at climate change. According to the head of Munich Re's Geo Risks Research/Corporate Climate Centre: "The increase of normalized losses over the past 40 years cannot be explained by higher property values and greater exposures alone. Warming oceans means more evaporation, which means more water in the atmosphere - which creates more favorable conditions for causing bigger thunderstorms. This is clearly backed by climate-science research and meteorological data. The chain of evidence is there that we can say we have the first footprint of global warming in more severe convective storms."5
The Insurer Climate Risk Disclosure Survey
It is against this backdrop that Connecticut and Minnesota recently mandated insurer climate risk surveys. Joining New York, California and Washington, Connecticut and Minnesota now require insurers doing business in those states to report in their filed financial statements (1) the impact of climate change on their balance sheets; (2) how insurers account for climate change risks in their risk and investment management strategies and other business decisions, including whether they engage in computerized climate modeling; and (3) the strategies they are using to address climate change-related risks and engage their policyholders to mitigate climate change. The requirement applies to licensed insurers whose annual direct written premium exceeds a specified threshold of $100 million or $300 million, depending on the state. The Insurer Climate Risk Disclosure Survey was originally adopted in March 2009 by the National Association of Insurance Commissioners (NAIC).
Further, the California Insurance Commissioner recently stated that the climate risk survey required by the California Insurance Department since 2011 has been expanded to require all companies writing more than $100 million in direct premiums to respond to the Insurer Climate Risk Disclosure Survey. The previous threshold in California was $300 million in direct written premiums. According to California Insurance Commissioner Jones, expanding the survey "will double the number of companies required to respond and will give insurance regulators, investors and policyholders a better picture of how insurers are responding to climate change."
According to Connecticut Insurance Commissioner Leonardi, "these surveys give us another window into the industry's risk management practices as they relate to changing weather patterns." Connecticut's climate risk survey requires reporting by all insurance companies that meet the criteria of at least $100 million in direct written premiums. Commissioner Leonardi added that the information obtained by the survey will also benefit insurance industry investors and reinsurers by providing "another opportunity for the industry to help us all chart a safer and more prepared approach for significant weather events to alternately mitigate damage and reduce costs for the consumer."6
Pursuant to section 308(a) of the New York Insurance Law, insurers licensed in New York that have collected direct written premiums of more than $300 million in 2011 must submit survey responses on behalf of their company or group. Insurers within groups to which the notice is addressed must answer this survey, but may submit a uniform response. A New York State Department of Financial Services letter to all licensed insurers dated March 2, 2012, set forth questions contained in the Department's climate risk survey for calendar year 2011 that were first adopted by the NAIC in March 2009 and March 2010.
Ceres, a nonprofit group that advocates for environmental leadership, authored a report in 2012 entitled "Stormy Future for USA Property/Casualty Insurers: The Growing Costs and Risks of Extreme Weather Events." Its report provides an analysis based on a review of U.S. property/ casualty insurance industry financial results as reported by AM Best and highlights how local governments and taxpayers face growing financial risks as insurers withdraw from high-risk regions. The Ceres report was endorsed by Washington Insurance Commissioner Kreidler and California Commissioner Jones. Both Washington and California were among the first states to adopt the requirement for a climate risk survey by insurers in those states.7
Insurer Climate Risk Disclosure Survey reporting by property and casualty insurers as part of the NAIC's uniform annual statement commenced after the NAIC released its white paper entitled "The Potential Impact of Climate Change on Insurance Regulation" in 2008. That report noted that global warming and the associated climate change represent a significant challenge for the insurance industry. The paper highlighted particular property and casualty insurer issues as well as property and casualty insurer loss prevention and mitigation issues. The announcements by the Connecticut and Minnesota commissioners came less than a month after the Obama Administration announced the National Climate Action Plan, requiring flood risk to be evaluated on a forward-looking basis. In the same week, FEMA released a report detailing the scale of the increased flood risk in the United States, due to rising seas and increasingly severe weather. The report estimated that the portion of the United States at risk for flooding will increase by 45 percent by 2100, doubling the number of flood-prone properties covered by the National Flood Insurance Program.
The President's National Climate Action Plan
In his speech detailing the National Climate Action Plan, the president mentioned the rising costs of insurance premiums resulting from the worsening extreme weather and added that the United States was "already paying the price of inaction." Reinsurance industry trade bodies, including the Reinsurance Association of America, welcomed the President's National Climate Action Plan requiring flood risk to be evaluated on a forward- looking basis and argued for greater private sector involvement in managing the risk.8
In testimony before the Senate Environment and Public Works Committee on July 18, 2013, Franklin Nutter, president of the Reinsurance Association of America (RAA), which represents companies such as Swiss Re Ltd. and Munich Re, stated that "the industry is at great financial peril if it does not understand global and regional climate impacts, variability and developing scientific assessment of a changing climate." While the RAA was the one industry group discussing global warming at the hearing, U.S. Senator John Barrasso (R-Wyoming) countered: "What we need to talk about is jobs â¦" because Democrats and President Barack Obama "are willing to bet the economy today on an uncertain" prediction "about the future."9
Conclusion
As objective evidence of climate change increases, and as the economic consequences of weather catastrophes increasingly and negatively impact the loss ratios and bottom-line profits of more and more insurers and reinsurers worldwide, there is an expanding multi-state effort by state insurance regulators to require more insurers to explain in their filed financial statements how they manage the enterprise risk of climate change. Requiring more insurers to report the impact of climate change on their investment portfolios and balance sheets, as part of their underwriting and rating, constitutes recognition by the insurance industry of the growing risk to solvency that catastrophic weather events present. In turn, these considerations may eventually engage the entire insurance industry and the NAIC more frequently in the national debate on climate change and environmental preservation.
1. "The Costs of Climate Change and Extreme Weather Are Passing the High-Water Mark," Time.com, July 17, 2013
2. Global warming to drive increase in severe thunderstorm risk in U.S.,Stanford research finds, Stanford Report, September 24, 2013
3. "Infographic: Why wildfires are getting worse in Colorado and beyond," Denver Westword, July 23, 2013
4. "Flood Damage in Central Europe Causes $22B in Economic Loss: Aon," Claims Journal, July 12, 2013
5. "Climate Change & Insurance: Existential Threat- or Extraordinary Opportunity?" Property Casualty 360º, February 5, 2013
6. "Two New States to Require Climate Risk Survey; More Companies Must Now Respond," Property Casualty 360°, July 18, 2013; "Minnesota Participating in Insurance Climate Change Survey," Insurance Journal, July 18, 2013
7. See also, Insurance Climate Risk Disclosure Survey: 2012 Findings &Recommendations, Ceres 2012
8. "U.S. Climate Plan May Mean Flood Opportunities," Intelligent Insurer, June 26, 2013
9. "Insurance Industry, Republicans Split on Climate Change," Bloomberg.com, July, 18, 2013