Insurance Companies Admit to Being Unprepared for Climate Change

The vast majority of insurers are unprepared to handle climate risks even though they acknowledge the impact of climate change on extreme weather events, according to a report by investor coalition Ceres.

In 2009, the National Association of Insurance Commissioners (NAIC) approved a mandatory climate risk disclosure standard for insurers, but it was later weakened in some states, which made participation voluntary and non public. Using data submitted by 88 insurers to regulators in six states, Boston-based Ceres, a coalition of investors and environmental groups, gauged the extent to which insurers see climate change as a key risk factor in their businesses.

Major insurers such as Allianz, Munich Re and Swiss Re have been warning about the potential consequences of climate change for years. But the insurance sector has generally failed to address the climate risks that pose a significant threat to its financial health and disclosure of climate-related impacts across the industry has been lacking, the report found.

"This means regulators and investors have been flying blind," said Jack Ehnes, CEO of the California State Teachers Retirement System and former Colorado insurance commissioner. "The survey, limited though it was, is hugely valuable."

There is broad consensus among insurers that climate change will have an impact on extreme weather events, with more than 75% of insurers naming perils that could be affected by climate change, according to the report.

But only 11 of 88 insurers have formal risk management plans in place, with ACE and Allianz USA among the most comprehensive disclosures, the report found. Allianz, for example, outlined an 18-point, long-term action plan encompassing objectives such as reducing its carbon emissions, developing products and services to address climate change and leveraging climate change research.

The insurance sector has about $23 trillion in investments, but less than 15% of insurers think their investments have definite exposure to climate risk. Half of the insurers think climate change may pose a risk to their investments while 31% believe climate change poses no risk at all to investments, according to the report.

Few insurers have explicit investment policies on climate change. AIG Chartis, AXA Group and Swiss Re include climate change in broader investment commitments for integrating environmental, social and governance factors.

The industry is largely focused on a narrow set of risks related to hurricanes and other coastal events, but the impact of rising temperatures are likely driving up losses from smaller, non-modelled events such as flooding, droughts, snowstorms, hailstorms and tornadoes, severely cutting into insurer profitability, the report stated.

After several quiet hurricane seasons post-Katrina, 2011 is serving as a "painful reminder" that a changing climate will inflict damage, said Sharlene Leurig, report author and senior manager of the Ceres insurance programme. Even before Hurricane Irene, insured losses were 40% higher than all of 2010 because of costly disasters such as hailstorms in Oklahoma and severe weather in the Midwest, she said.

The Ceres report praised insurers Harleysville and PMA Group for their specific disclosures regarding extreme weather events, including identifying which areas of the US are most vulnerable to particular perils, but noted they are the exception.

Ceres suggested that insurers should be made to respond annually to NAIC's standard and the results should be released into the public domain. "It's something I'm going to continue to advocate for within the NAIC," said California Insurance Commissioner Dave Jones, co-chairman of NAIC's climate change task force.

NAIC should also be more specific about its disclosure requirements because some responses were vague and unhelpful, Ceres noted. 

"Investors will be very concerned about providing resources for the industry if the information is not forthcoming," Ehnes said.

By. Gloria Gonzalez

Source: Environmental-Finance