We have talked a lot about hurricane season and the storm modeling software used by insurance companies. As insurers have evaluated the storm risks, they have proposed higher rates — Florida homeowners could be faced with huge premium increases based on the hurricane projections alone. But what would happen if actuaries factored climate change into loss projections?
Researchers recently conducted a study of insurance companies’ approaches to climate change. The results show that the industry may not be considering climate change challenges in risk management and underwriting plans.
According to the report, both consumers and business are feeling and will continue to feel the impact of climate change. For example, businesses are facing additional greenhouse gas regulations. Every new regulation brings compliance costs and risk.
Both homeowners and businesses face greater risks of property damage because of changes in annual precipitation and drought.
Consider the drought in Texas right now. Most of the state is rated D4, or an exceptional drought, by the U.S. Drought Monitor. The drought impacts are listed as both agricultural and hydrological — that is, the drought is affecting grasslands, pasturelands, crops and the water supply.
Anyone who works in farming or livestock is at risk of significant business losses this year, as are downstream enterprises. No product, no distribution, no wholesale and no retail.
Homeowners are facing a more immediate risk: fire. Wildfires have claimed more than 1,500 homes over the past few weeks. Families have lost everything — they had just minutes to evacuate.
The drought could also have a long-term effect on the state’s supply of fresh water — that, in turn, could affect grasslands, pasturelands and crops. Not the “circle of life” example parents want to share with their kids, is it.
A greater understanding of climate change would not have prevented these losses. That doesn’t mean that, even with a better appreciation for the risk, insurers would be powerless.
We’ll continue this in our next post.
Source: AdvisorOne.com, “Climate Change Endangers Insurance Industry: Ceres,” Marlene Y. Satter, Sept. 5, 2011Share