Climate change poses a growing risk to the financial stability of insurance companies and has broad ramifications for the economy and for society. That’s according to a new report put together by US shareholder lobby group Ceres.
Ceres works with more than 130 member organizations with the stated goal of building a sustainable global economy. Its members include environmental and social non-profit groups such as NRDC, Union of Concerned Scientists and Oxfam, institutional investors such as the California and New York public pension funds, socially responsible investors (SRIs), labour unions and other key stakeholders.
In 2003, Ceres launched the Investor Network on Climate Risk (INCR), a network that now includes 100 investors collectively managing more than $10trn in assets.
The new report from Ceres suggests a proactive approach that insurers, regulators and investors can take to address climate change risks “at a time when scientific evidence shows that climate change is contributing to stronger, more frequent weather events, including heat waves, drought and flooding”.
Mindy Lubber, president of Ceres, says that a small number of insurers have started to mobilize a response to the global threat of climate change, “but far broader engagement and action from the industry is needed”.
Washington State insurance commissioner Mike Kreidler, who wrote the report foreword and endorsed its key recommendations, said in a statement: “Insurance is the first line of defence against extreme weather losses, but climate change is a game-changer for the models that insurers have long relied on. Companies will need to adapt if insurance is to remain available and affordable.”
Insurance commissioners in Washington, California and New York already require major insurers to disclose their potential exposure and strategies for dealing with climate change risks. Such mandatory disclosure is among a dozen recommendations in the report for insurance companies, insurance regulators and investors.
The report has other recommendations for industry stakeholders, notably investors.
For example insurance sector investors and rating agencies need to encourage insurance companies to improve disclosure of climate change risks/opportunities and response strategies, the report says. Disclosure expectations should be consistent with disclosure mandates now being required by state insurance regulators in New York, Washington and California.
Investors should conduct their own analysis of insurance company exposure and management responses to extreme weather risks and other climate-related impacts. They should build climate change management practices into regular dialogues with insurance companies and other companies being impacted by climate change.
“As a long-term investor, CalSTRS is dedicated to making sure climate change is factored into the regular risk management practices of our portfolio companies, especially those in the insurance industry,” Jack Ehnes, chief executive officer of the California State Teachers’ Retirement System (CalSTRS), said at the report’s launch news conference. “By integrating climate change risk management into their practices, insurance companies greatly improve their abilities to offer sustained shareholder value.”
The report points out that last year’s spate of extreme weather, including damaging floods, heat waves, hailstorms and tornadoes across much of the interior US, contributed to net underwriting losses of $34bn and the most credit downgrades in a single year since 2005, the year Hurricane Katrina hit the Gulf Coast.
“While 2012 private insured losses so far are lower, total economic losses due to extreme weather have been no less troubling this year. The drought alone is expected to cost insurers roughly $20bn, with most of those costs being borne by the federal crop insurance programme. However, more than $5bn will also be paid by private insurers,” the report says.
The report recommends that insurance companies do a better job evaluating and pricing changing weather risks in their underwriting. This means developing and using more robust research and new catastrophe models that better reflect the latest science on extreme weather. And if insurance companies want to keep markets viable and affordable, they must exert more influence on where and how buildings and infrastructure are built in order to reduce vulnerability to growing weather extremes, the report adds.
In the long term, the report says, the insurance industry should advocate for government policies that will accelerate cleaner energy while reducing carbon emissions.
“Just as the insurance industry asserted leadership to minimize building fire and earthquake risks in the 20th century, the industry has a huge opportunity today to lead in tackling climate change risks,” Ceres president Lubber said at the report’s launch.
The US property/casualty insurance industry has been slow to acknowledge the implications of climate change for its business, compared to its European counterpart. And it is unlikely that the US industry will immediately act on Ceres’s recommendations. But the mandates now being required by state insurance regulators in New York, Washington and California mean that climate change denial is no longer an option. And the Ceres report, backed as it is by big investors, shows that insurers can influence change that could benefit everyone.