By Bryant Rousseau
With additional reporting by Phil Gusman, Chad Hemenway, Melissa Hillebrand, Anya Khalamayzer, Shawn Moynihan, Arthur D. Postal, Mark Ruquet and Laura Toops
Few—if any—industries would seem to face a greater existential threat from the effects of climate change than insurance. As flood waters rise, as hurricanes and tornadoes grow more intense and as droughts last longer, trillions of dollars of insured assets are at risk. In the ugliest scenario imaginable, even the most solvent, best-managed carriers are overwhelmed by catastrophe claims and driven into bankruptcy. The insurance industry, as we know it, ceases operations.
On the hurricane front, one bit of good news is that the general expectation is for fewer named storms to form, with most climate models predicting higher wind shear and velocity in the upper stratosphere that will make it more difficult for tropical depressions to organize.
One of the more fascinating scenarios circling around the pricing question is the “strange bedfellows” situation to which it could quite conceivably give rise: Joining forces to collectively push for greater rate freedom could be free-market conservatives—those against pricing regulation and any sort of government-subsidized insurance program (i.e. the National Flood Insurance Program, or NFIP)—with left-leaning environmentalists who would welcome the strong signal sent by higher rates about land use in particular (i.e., don’t overbuild on the shoreline) and, more broadly, about the true cost to consumers and businesses of not doing more to address climate change. Many skeptics, in other words, might be converted to the carbon-cutting cause if their insurance bill tripled.
Even for risks written on non-admitted paper, however, where rate restrictions largely do not apply, insurers do face a real and potentially disastrous dilemma. Underwriting decisions have always been based on historical data. If the replied-upon models no longer accurately capture the frequency and ferocity of risk—and there is growing concern on this front as the past becomes an increasingly unreliable predictor of events on a changed planet—then insurers could underprice policies to a survival-threatening degree.
But severe flooding and wind storms can lead to both first- and third-party Environmental claims for many businesses that may not think they need protection against pollution-related risks. Big storms, for example, can dislodge tanks of petroleum or cause waste to flow from an insured’s property to another—or vice versa. Insureds “need to make sure they’re considering those kinds of risks when deciding whether or not to purchase pollution coverage,” says Taylor.
Chris Smy, global practice leader of Marsh’s Environmental group, agrees. “We have definitely seen more clients purchasing Pollution insurance the last few years,” he says. Part of what’s driving this trend is the low Environmental premiums currently being charged. But he says another factor, echoing Taylor, is increasing awareness of the Pollution risks that follow severe storms. “[A company] may not be making or storing hazardous materials, but their business can feel the impact from the operation of others. Consider the disruption created if a storm causes sewage overflow onto your property.”