U.S insurance sector showing “profound lack of preparedness in addressing climate-related risks”: Report

“As key regulators of this sector, we strongly encourage insurance industry leaders and investors who own these companies to take this challenge far more seriously,” said Washington Insurance Commissioner Mike Kreidler, who wrote the report foreword and chairs the NAIC’s Climate Change and Global Warming Working Group. “The insurance industry is uniquely positioned as the bearer of risk to make adjustments now to lessen dramatic impacts we know are coming. This is not a partisan issue, it’s a financial solvency issue and a consumer protection issue.”

Three of the nine top scoring companies were global reinsurance companies, including Munich Re, Swiss Re, and XL Group.

“Rising value concentrations in cities, new growth regions, and ever-greater risk accumulations, have combined with climate uncertainty to make the management of natural hazards an increasingly critical issue,” said Tony Kuczinksi, President and CEO of Munich Re America. “For this reason, climate change presents complex risks to the property and casualty insurance industry, but it also presents a number of business opportunities. We see tremendous opportunity for our industry to take a leadership role in addressing climate change by delivering solutions that not only transfer risk but incentivize its reduction.”

“We believe that understanding the risks associated with climate change, coupled with environmentally responsible business practices, will enhance The Hartford’s competitive position, but as importantly, they are simply the right things to do,” said Alan Kreczko, the Hartford’s general counsel and chair of the company’s Environment Committee.

“Many of our customers recognize the economic and risk reduction benefits of green buildings and sustainable business practices,” added Noel Douglas Martin, Vice President and Assistant General Counsel, Firemen’s Fund Insurance Co., a member of the Allianz Group. “Supporting them with responsive products and services is simply a matter of good business.”

Martin noted that Fireman’s Fund is widely recognized for its innovative green building insurance and risk services in the U.S. Allianz has developed more than 150 green solutions across all business segments globally, generating more than $1.4 billion in revenues.

The report cites numerous studies and on-the-ground examples of how rising global temperatures are driving sea level increases, and more pronounced extreme weather events are causing larger damages and losses in coastal and non-coastal areas alike. The insurance sector is on the veritable ‘front line’ of these escalating financial risks, especially property & casualty firms, which often bear the financial brunt of extreme weather losses.

Insured losses from Hurricane Sandy alone totaled more than $29 billion.

The changing climate also has major implications for life & annuity insurers, especially in regard to their vast investment portfolios. L&A firms have trillion of dollars of investments — roughly two-thirds of the U.S. insurance sector’s total cash and invested assets — that may be affected by wide-ranging climate-related ripples across the economy, including physical impacts, carbon-reducing regulations and fast-growing clean energy opportunities.

Among the report’s key findings:

  • Overall, larger insurers (over $5 billion in direct premiums) showed stronger climate risk management practices than smaller companies.
  • While the P&C sector had higher overall scores than the Health and L&A segments, only eight of the 193 P&C firms – four percent – earned a Leading rating and only 20 percent had a Developing rating.
  • Nearly half of P&C insurers have taken positive steps in terms of climate modeling and analysis. In many instances, insurers are using climate-informed catastrophe models to better quantify climate-related risks from more frequent and intense weather catastrophes.
  • Only thirteen of the P&C insurers — seven percent — earned a Leading rating for climate risk governance practices, including The Hartford and Catlin, which have cross-functional committees that monitor/report to senior management and their boards of directors on climate risks and opportunities.
  • Despite evidence that extreme heat waves and other climate-related impacts will influence morbidity and mortality trends, L&A and health insurers show widespread indifference to climate risk, both in regard to their core business lines and their investment strategies. Only one of the 92 L&A companies — Prudential — earned a Leading rating.
  • None of the health insurers earned a Leading rating and only one earned a Developing rating.
  • Barely 10 percent of the insurers overall have issued public climate risk management statements articulating the company’s understanding of climate science and its implications for core underwriting and their vast investment portfolios.

The report includes specific recommendations for insurance companies, including:

  • Develop climate risk oversight at the corporate board and top senior executive levels.
  • Integrate climate change as a key ongoing risk into enterprise risk management frameworks.
  • Issue comprehensive, public climate policies that articulate the firm’s understanding of climate science, underwriting and investment practices, and public engagement on climate issues.
  • Improve climate change scenario and impact assessments by using climate-informed catastrophe models and climate scenario projection software, which can help in fine-tuning insurer product offerings and pricing.
  • Boost public engagement on climate risks, including advocacy for investments in resilient public infrastructure, educating policyholders on climate mitigation and promoting climate-smart insurance products.

The report also includes recommendations for insurance regulators, including:

  • Mandate climate risk disclosure by insurers in all 50 states. Only six states — California, Connecticut, Illinois, Minnesota, New York, and Washington — now require insurers operating in their states to fill out the NAIC’s climate risk disclosure survey.
  • Work with ratings agencies such as A.M. Best to develop formal evaluative measures of insurers’ climate risk management programs.
  • Create a database of insurance-relevant and peer-reviewed climate science research that all insurers can utilize to accelerate their responses to climate risks.