Research from NASA points to several factors that support climate change from rising sea levels to warming oceans and glacial retreats. The effects of climate change have a significant impact on the insurance industry, which generates considerable premium, expense, and losses based on insured catastrophes. As these events become more unpredictable and severe, the industry must adapt.
In our October 12 edition of AAIS Pulse, several experts shared their perspectives on climate change and its impact on the industry.
Climate Change in Personal Lines
Munich Re’s Serena Garrahan, Flood Product Manager, and AAIS’s Dr. Matt Hinds-Aldrich, Fire Peril – Risk Strategy Lead, say that climate change is just one of several factors contributing to the increase in wildfire severity in the Western U.S. and flood activity in the Gulf.
Dr. Hinds-Aldrich believes that climate change gets the most attention when referring to causes of wildfires, as persistent droughts, extreme temperatures, and abundant foliage affected by climate change have led to worsening wildfires. However, he emphasizes that more traditional “kitchen fires” remain the main drivers of fire loss overall.
Ms. Garrahan notes that in five years, the U.S. has had nine billion-dollar flood events and that the average number per year has continued to increase since 1980. Because warmer atmospheres are better able to hold water, we’re seeing 5 to 6 percent more moisture for every degree Celsius change. This leads to dramatic increases in heavy rainfall patterns and more severe storms leading to higher catastrophe losses over time.
Regulators and Climate Change
Maryland Insurance Commissioner Kathleen Birrane is a member of the National Association for Insurance Commissioners (NAIC) Climate and Resiliency Task Force, leading the solvency workstream. They are tasked with looking at the underlying financial impacts to insurers from climate change. “Climate change…brings a whole different set of risks that we don’t traditionally think about,” explains the Commissioner. “Everything from reputational risk, litigation/ liability risk, to transition risk – what is the risk inherent on both sides of the balance sheet…”
Commissioner Birrane says the goal of regulators is to provide companies with direction on what they should focus on and how. “We’re looking in a very detailed way at all the traditional tools that regulators use for financial surveillance to determine…how they need to be tweaked or developed in order to have better information and…how to look at elements of climate risk beyond underwriting risk.”
An Industry Perspective on Climate Change
Industry expert Bob Hartwig, Ph.D., CPCU, a Professor at the University of South Carolina’s Moore School of Business, said the insurance industry is doing a very good job of assessing climate change. “Adapting to variability and volatility in the climate is in the very DNA of the property and casualty and reinsurance industries,” he explained. “We’ve been doing it successfully not just for the past couple years or couple decades, but quite frankly in the case of some insurers, for centuries.” He says the industry is providing the products necessary to absorb the impact of climate change, and points to the industry’s ongoing ability to attract substantial amounts of capital despite record numbers of catastrophes. He explains that the investment world would have long abandoned insurance if there was not confidence in its ability to handle climate change-related events.