Insurers Must Factor For Climate, Say Consultants

Insurers need to account for climate change in their underwriting, according to a consulting firm, which says insurers' greatest risk of natural catastrophe comes from hurricanes.

Insurers "need to factor in issues surrounding climate change and must look to incorporate long-term weather trends into their pricing," advised Tom Hettinger, managing director of the San Diego-based actuarial consultants EMB America.

"Companies should not be resting on their laurels when developing risk management strategies and determining prices," Mr. Hettinger said.

EMB issued a statement warning that in 2008 hurricanes pose the greatest "act of nature" risk to the U.S. insurance industry and insurers should prepare for this heightened exposure.

The threat of hurricanes has been at the top of the U.S. property-casualty insurance risk list since Hurricane Andrew devastated southern Florida in 1992, causing an estimated $26.5 billion in damages. Despite a drop in land-falling hurricanes in 2006 and 2007, both years experienced higher-than-average hurricane activity in the North Atlantic, EMB noted.

The firm said since the events surrounding Hurricane Katrina in 2005 and multiple land-falling hurricanes in 2004, U.S. insurers have experienced the implications of the increased frequency and severity of hurricanes nationwide.

EMB said it cautions insurers not to be lulled into a false sense of security based on the relative calm of the past two years.

"We've seen the devastating effects of hurricanes--homes and other property completely destroyed. Insurance companies are still struggling to recover from Katrina," said Alice Gannon, senior consultant of EMB America.

"The past two years have been quieter for insurers, but meteorological research indicates that we still experienced an uptick in North Atlantic hurricane activity. This is a trend that is likely to continue for several years, so insurers must prepare themselves to withstand losses in the event of another catastrophic landfall," Ms. Gannon continued.

EMB advised that while hurricanes top the list of p-c insurance risk, other "acts of nature," including tornadoes, earthquakes, winter storms, fire and hail, must also be accounted for when insurers assess their pricing strategies.

The recent Atlanta tornado, which caused an estimated $250 million in damage, and the 2007 California wildfires, which cost insurers over $1.5 billion, have made this clear, the firm said.

Overall catastrophe potential in a location as geographically diverse as the United States means that no insurer is completely safe, in EMB's evaluation.

In order to stay ahead, EMB said, p-c companies must develop detailed enterprise risk management (ERM) strategies and processes that account for the risks in a shifting climate.

"Accounting for the unaccountable, as we do with these 'acts of nature,' is the largest obstacle facing insurers," said Mr. Hettinger.

He added that in doing so, to remain competitive, insurers must explore solutions that give them the ability to see each component of pricing and predictive modeling interact--for example, how the surge in hurricanes will affect pricing.

Such an advantage allows insurers to view the impact of particular natural disasters, locations, etc. on risk levels and thus set appropriate rates.

"This increased insight will enable them to more easily adapt to and prepare for the destruction that results from unpredictable forces of nature," he added.