For all the trouble insurance causes Floridians, raising rates or leaving the state, there is an upside: Floridians must be some of the savviest insurance consumers in the country. In northern states, natives say it's okay to complain about the weather, just understand that it'll change in five minutes. Here, we can say the same thing about the homeowner insurance market.
It seems strange, then, that insurance companies have reacted so slowly to climate change. The industry has been quick to adopt hurricane models (discussed in past posts) but slow to incorporate climate change into risk and actuarial models. A recent survey shows that insurance companies agree that climate change will affect insurance, but the survey also shows they've done little to plan for it.
For example, the report makes some interesting points about catastrophe models and insurance companies. Very few insurers can afford to develop their own models, so most rely on the models developed by companies with expertise in the area. As we've seen, that means that most insurers are relying solely on risk models developed by vendors.
That reliance would be fine if the models were comprehensive, but, the researchers say, these models "only marginally" take climate shift into consideration. Most small insurers, then, are setting rates based on models they may not realize are not incorporating climate change.
The upshot is greater risk for insurers, shareholders and consumers. Insurers set rates and capital allocations based on the models without considering the likelihood of extreme and volatile losses associated with different types of weather events and the fluctuating time intervals between events.
The report suggests that insurers complete a similar survey every year and that the results be published. By making the companies' approaches to and understanding of climate change public, the survey's sponsor, the National Association of Insurance Commissioners, can help insurers understand and address their own shortcomings. Regulators, too, would be able to work more effectively with insurers, and shareholders will be able to exert some pressure, as well.
Consumers? Consumers will be a bit farther downstream in this process. Consumers can pressure their legislators to adopt more stringent regulations, and consumers can learn which companies seem to have a better handle on climate change planning. In the end, though, consumers may well be standing by, tapping their toes as they wait for the industry to catch up.
AdvisorOne.com, "Climate Change Endangers Insurance Industry: Ceres," Marlene Y. Satter, Sept. 5, 2011