Turning Up the Heat: The Insurance Industry and Climate Change: "Everybody Talks about the Weather, but Nobody Does Anything about It, "Wrote Mark Twain. as the Realities of Climate Change Become Increasingly Apparent, This Sentiment Has Never Been Truer. and since Few Businesses Have as Much at Stake as Insurance Industry, It Is Time to Stop Talking and Get Down to Action

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After decades of unheeded warnings, scientists--with the help of Al Gore--finally won over the skeptics. Recent reports from the United Nations Intergovernmental Panel on Climate Change have essentially ended the public debate that human activities are a contributing cause of climate change and that climate change is a leading cause of extreme weather events.

The dangers posed are well-documented. Rising sea levels, intensified hurricanes, unstoppable wildfires, extended droughts and severe floods will continue to drastically affect the entire globe over the coming decades.

For the insurance industry, which has increasingly turned its attention to the topic since the record hurricane seasons of 2004 and 2005, these realities all present an ominous level of unpredictability. In an ever-changing climate, how can models and loss data based on historic events be relevant to the future?

To actually slow climate change in the near-term, carbon dioxide emissions will have to be curbed and most experts believe this can only be done legislatively. Insurers have already conducted reports and joined coalitions to lobby for public policy solutions, but given the industry's general standing in Washington--not to mention among voters--it seems unlikely it will be a major factor in that debate.

Until true solutions surface, however, there are things the insurance industry can do to effect change. Thus far, insurers main reaction to the rising weather-related claims costs has been increasing rates and deductibles, adding exclusions to policies and, in extreme cases, avoiding writing risks in areas exposed to catastrophic losses. But the industry also has the power to influence societal behavior and, in its own way, mitigate the risks of climate change.

1) Manage and price property risks related to extreme weather events

2) Focus on underwriting third party liability claims against heavy greenhouse gas emitting industries for the climate change-related exposures they create

3) Continue to create and implement new products offering solutions for climate change-related risks

Weather and Property Risks

Since Hurricane Andrew caused an unprecedented $26.5 billion of damages in 1992, the insurance industry has been closely watching exposures and losses resulting from tropical storms. The industry's concern was confirmed in 2004 when Hurricanes Charley, Ivan, Frances and Jeanne hit, causing more than $40 billion dollars of damages across Florida, Alabama, Georgia, the Carolinas and parts of the Northeast.

After these storms, insurers increased rates for homeowners and commercial insurance policies, replaced fixed-dollar deductibles with percentage-based amounts and, in some cases, simply ceased doing business in coastal states. These states responded by creating insurance pools and tightening building codes to make newly constructed homes more resistant to hurricane exposures.

More recently, just as the final tolls from the 2004 storms were being calculated, the most devastating storm in U.S. history, Hurricane Katrina, slammed into the Gulf Coast, only to be followed by Hurricanes Rita and Wilma weeks later. The collective losses exceeded $100 billion dollars.

Insurers reacted swiftly to reduce their exposures to future storms and to reconsider the models they had been using to predict weather-related losses. As a result, a number of states are now experiencing an insurance crisis. Rate increases over a five-year period range anywhere from 50% to more than 500% in states subject to severe windstorm losses, making homeowners policies in some coastal areas nearly as expensive as mortgage payments.

While property insurers have attempted to match premiums with losses in areas subject to wind damage, their efforts have often been frustrated by state regulators who refuse to allow adequate rates for fear of pricing residents and businesses out of the market. …