A new report from Ceres has found a "profound lack of preparedness" when it comes to addressing the risks and opportunities associated with climate change issues. The study involved 330 insurers representing approximately 87% of the U.S. insurance market based on direct premiums written. Using a 100-point scale companies were rated in four categories:
- Leading – 75 points or higher
- Developing – 50-75 points
- Beginning – 25-50 points
- Minimal – under 25 points
Of the companies that participated, only 3% (nine companies) received a "Leading" score: ACE, Allianz, The Hartford, Munich Re, Prudential, Sompo Japan, Swiss Re, XL Group and Zurich Insurance. Eight-three percent of the companies (276) earned only "Beginning" or "Minimal" ratings.
The companies were ranked on five core themes that aligned with National Association of Insurance Commissioners' (NAIC) Climate Risk Disclosure Survey:
- Governance
- Risk management
- Investment strategies
- Greenhouse gas management
- Public engagement
The companies were also rated on the overall quality of their responses to the survey questions.
Larger insurers were more prepared than smaller companies when it came to climate risk management practices.
"A big positive in the report's findings is the strong leadership among a small number of property & casualty (P&C) insurers – a trend that needs to become far more mainstream if the industry is to accelerate global responses to this colossal threat," said Ceres President Mindy Lubber.
In fact, P&C insurers demonstrated a far more advanced understanding of the issues than their counterparts in the life & annuity (L&A) and health insurance segments. Less than 10% of the insurers have even issued some sort of public climate risk management statement explaining their company's view of climate science and the implications for underwriting and investment portfolios.
Extreme weather events, rising sea levels, flooding and other events put P&C insurers on the front line when it comes to climate change risks.
There is also compelling evidence that these risks will continue to grow. Oceanfront properties on both coasts, both insured and uninsured, are being threatened by rising sea levels. Information and analytics provider, CoreLogic, said in its July 2014 report that it had identified more than 6.5 million homes in the U.S. that were at risk of storm surge damage. The total reconstruction value would run to nearly $1.5 trillion.
The report noted that the "P&C segment's reaction has frequently been to limit coverages or entirely withdraw from certain catastrophe-prone markets, especially coastal regions such as Long Island, Virginia, Delaware and Florida." The result is that the risks are transferred to public institutions and local populations, which reduces their resiliency and the ability to recover from disasters.
Other risks for P&C insurers include crop losses caused by heat waves and droughts, supply chain risks, and business interruption losses.
And while the P&C segment scored higher than other segments, only 4% of insurers earned a "Leading" rating and 20% received a "Developing" rating, leaving another 75% who are not addressing climate risks.
Recommendations for P&C insurers included ensuring that the most current climate science and projected climate impacts were being modeled by their vendors and that the risks associated were accurately communicated through pricing and underwriting. Insurers should also be aware that even though they are reducing their risks or eliminating coverage in certain areas, there could still be solvency risks if a major catastrophe impacted multiple geographic regions.
There were seven general recommendations for insurers, regardless of the segments they covered:
- Implement climate risk oversight at the senior executive level.
- Develop and issue a public risk management policy for stakeholders.
- Integrate climate risk into ERM frameworks.
- Understand future risks and opportunities of climate change.
- Share their perspectives with key stakeholders.
- Provide comprehensive information on climate risk to regulators.
- Participate in industry initiatives on climate risk.
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