Insurance Companies Unprepared for Climate Change, Report Says
A road outside Wardsboro, Vermont collapsed under the floods from Hurricane Irene. Most homeowners don't have insurance that covers flood damage. Credit: Lew Holzman/flickr.
Across much of Vermont, New York, and New Jersey this week, home and business owners have been coping with devastating flood damage unleashed by Hurricane Irene. The immense storm is already listed as one of the costliest natural disasters in American history, and total damage expenses will probably surpass $10 billion. Unfortunately, for most people affected by the storm, standard insurance doesn’t cover flooding, which means individuals will be footing repair bills on their own.
But insurance companies aren’t off the hook in the wake of Irene. In a year with a record number of billion-dollar weather disasters, Hurricane Irene has added to an already expensive year for insurers.
“Even before Irene, insured losses in the U.S. this year were 40 percent higher than in all of 2010,” says Sharlene Leurig, the author of a new report from Ceres examining how insurance companies are preparing for climate change. “Unfortunately, science is telling us that more years in the future are going to look like 2011.”
Scientists expect that as the climate changes, extreme weather-related events, like floods, drought, wildfires, and hurricanes, are going happen more often. In fact, such trends are already taking place, particularly in the case of heat waves and extreme precipitation events. But according to the Ceres report, most insurance companies are unprepared for how to cope with the risks that a warmer climate poses. Ceres is a national coalition of investors and environmental organizations focused on sustainability.
Only one in eight insurance companies have formal climate change policies in place, the report says, drawing from a survey of 88 insurance companies from across six states. The survey was issued by the National Association of Insurance Commissioners to evaluate how U.S. insurance companies are considering climate change risks.
Of the of insurance companies without climate change strategies, however, nearly half said they believed climate change was a risk factor for the company. This means that while most insurance companies anticipate risks associated with climate change — such as more frequent extreme weather events or the spread of more infectious diseases — many aren’t yet changing the way they do business to address these hazards.
“There is consensus among insurers that climate change will drive more frequent or severe losses from extreme weather,” says Leurig. Yet, she says, too many companies still make predictions that rely on historical weather data and models that are increasingly irrelevant in a changing climate.
Among the companies that have established climate change policies, most are large multinational agencies that offer several types of insurance. For example, the insurance company Zurich has developed a climate initiative and also relies on guidance from a climate change advisory council to assess their vulnerabilities and how to mitigate them.
Zurich’s chief climate product officer, Lindene Patton, says the company wants to ensure it can manage its climate risks effectively, and also help its customers be more prepared for climate change. “We want to figure out how to use the tool of insurance to incentivize both mitigation and adaptation to climate change.”
On the other hand, the report shows that smaller insurance companies and ones that specialize in one or two types of insurance were less likely to have taken any action in managing their climate change risks.
The report points out that many insurance companies have taken a narrow view of climate risks, focusing their attention on coastal areas where hurricanes might strike. But if 2011 is a harbinger of our future climate, extreme weather in other parts of the U.S. can also be catastrophic and costly. For example, economic losses from the record drought in Texas may total several billion dollars.
The Ceres report also points out that because the insurance industry is responsible for more than $23 trillion in global investments, its vulnerability to climate change could affect the global economy.
The new report only draws on survey responses from six U.S. states that require insurance companies to disclose how they are managing their risks associated with climate change: California, New York, New Jersey, Pennsylvania, Oregon and Washington. Ceres recommends that in the future, all states should make the survey mandatory and the responses public so insurance regulators can also better understand climate change risks.