Risky Business

In September 2005, Al Gore was scheduled to address the National Association of Insurance Commissioners in New Orleans about the potential impact of climate change on the insurance industry.

The meeting was postponed—due to Hurricane Katrina. But the message got across. The hurricane itself served as a wake-up call to the industry, violently illustrating the type of extreme weather climate scientists predict will become more common as the planet grows warmer.

In the years since, insurers have launched hundreds of efforts to better assess and mitigate climate change risks. Ceres, a coalition of investors and environmentalists, surveyed insurers in 2008 and counted 643 climate-related initiatives underway at 246 companies worldwide. The efforts range from funding research for new risk models to innovating new products and policies aimed at reducing carbon emissions, such as pay-as-you-drive auto insurance. Altogether, they paint a picture of an industry in the early stage of reevaluating both its risk and its responsibility with respect to climate change.

What spurred this newfound sense of urgency was the largest single year on record for U.S. catastrophe-related insurance payouts. Average weather-related losses had already been growing faster than premiums, population or the economy, from an average of about $1 billion per year in the 1970s to about $17 billion per year in the decade leading up to and including Katrina. The total for 2005: $71 billion. Allianz, Europe's largest insurer, has said it expects weather-related losses to surge 37 percent during the current decade as intensity and frequency of flooding, wildfires and tropical storms grow due to global warming.

U.S. insurers are highly sophisticated when it comes to projecting risk based on historic trends. However, in a changing climate, logic suggests that what happened in the past becomes less telling for the future. The challenge, insurers say, is that most climate change research focuses on long-term global or regional impacts, while most insurance decisions revolve around short-term risk to a specific address or property. There may be strong evidence that climate change will bring more frequent and intense weather-related events. But where? And when?

"There is no climate change model out there anywhere in the world today that can tell you with a degree of precision that would be necessary to factor into rates," says Robert Hartwig, president of the Insurance Information Institute.

That may change soon. The Insurance Information Institute has partnered with Lloyd's of London and Harvard University, among others, to create new weather-related catastrophe models that incorporate relevant data from climate change science.

Meanwhile, taking advantage of the opportunity to reduce the future threat of climate change by reducing release of planet-warming carbon dioxide, insurers are introducing new products to support renewable energy and energy conservation.

One example is wind and solar power derivatives — basically, insurance for renewable energy developers that the wind will blow or the sun will shine. The guarantees spread the risk and make projects easier to finance.

In addition, at least two dozen auto insurers now offer pay-as-you-drive plans, in which the less customers drive, the less they pay. A pilot study by Progressive found that participants in Texas reduced their miles driven by about 5 percent. Several auto insurers now offer discounts for driving fuel-efficient or low-emission vehicles.

"I don't think it's really broadly understood by the general public just how much influence insurance potentially has over behavior," says Andrew Logan, director of oil, gas and insurance programs at Ceres.

Ceres recently helped convince the National Association of Insurance Commissioners to pass a policy recommendation to its members—state insurance regulators—asking them to require insurers in their states to publicly disclose how they are preparing for climate change. A handful of states have adopted the policy, including several large states with concentrations of insurance company headquarters.

Those reports are starting to become available, and so far they confirm what Logan already sensed: action is uneven, and, beyond a handful of leaders, many companies aren't yet taking the issue as seriously as they should be.

"We've seen a lot of good progress over the last five to seven years," he says, "but in a lot of ways we're still really scratching the surface."

DAN HAUGEN is a Minneapolis-based freelance writer who covers business and technology. His work has been published in Twin Cities Business, Delta Sky and other publications.

Further Reading

From Risk to Opportunity: Insurer Responses to Climate Change

Read the 2009 report commissioned by Ceres, a national coalition of investors, environmental groups, and other public interest organizations working with companies to address sustainability challenges such as climate change.

Insurance Information Institute

Since climate change could lead to losses on a scale never before experienced, insurers are not waiting for researchers to produce all the answers. Visit the website to view recent developments.