Insurance Industry Perspectives on Extreme Weather Events

The Environmental and Energy Study Institute (EESI) organized a briefing on insurance industry perspectives on recent extreme weather events and how strategic investment can help manage the threats posed by a changing and more severe climate. In New York, Washington and California, insurance companies are required to disclose their climate change response plans, and many insurers are considering modifying rates and expected payouts to address increasing extreme weather events and rising sea levels.

As experts in assessing, quantifying and transferring risk, the insurance industry is a natural partner for the federal government as it looks to manage extreme weather vulnerability. The briefing included the industry’s response to the growing number of very costly climate-related disasters and considered how public-private collaboration can help manage risk and guide policy to promote long-term resiliency.

 

• Carol Werner, EESI’s executive director, began the briefing by noting the recent uptick in extreme weather (droughts, wildfires, tornados and hurricanes). She asked: how do we make infrastructure and communities more resilient? What is the economic impact of extreme weather? How can we mitigate the impact of super-storms on properties and communities?
• Frank Nutter, President of the Reinsurance Association of America, discussed the role of reinsurance in catastrophes like Hurricane Sandy. He noted that reinsurance will typically pick up 50 percent of the losses in hurricanes. Mr. Nutter further noted that New Jersey was underinsured for Hurricane Sandy.
• Hurricane Sandy was one of the most impactful in the nation’s history; at $25 billion in anticipated paid claims, it is likely to become the third most expensive hurricane in terms of insured losses, after Hurricanes Katrina and Andrew. Of all U.S. disaster events in recent history, including 9/11, Hurricane Sandy will be the fifth most costly in terms of insured losses.
• Mr. Nutter remarked that 10 of the 12 most costly hurricanes in insurance history (adjusted for inflation) occurred in the past eight years (2004-2012). The number of federal disaster declarations hit 99 in 2011, shattering the 2010 figure of 81, which itself was substantially above the yearly average of 35 since 1953. There have been 171 natural disasters in the U.S. from 1980-2011.
• Resiliency strategies should include the following: minimum standards for building codes (building codes are inconsistent, particularly on the Gulf coast); risk-based pricing of insurance; use of nature to mitigate damage and protect lives and property; additional funding for weather satellites and remote sensing so local officials can be as informed of conditions as possible.
• Mr. Nutter suggested that perhaps the National Transportation Safety Board (NTSB) could be a model for a federal resiliency assessment agency that identifies weak points and addresses them.
• Lindene Patton, Chief Climate Product Officer at Zurich Insurance Group, spoke about a "climate resilience gap" from the lack of investment in crucial infrastructure.
• Ms. Patton noted that Hurricanes like Sandy cause significant economic destruction and highlighted how insurance secures economic stability. The economic impact of Hurricane Sandy on the state of New Jersey is estimated at $39 billion, while the state of New York is estimated to have suffered $50 billion in losses.
• New building codes should reflect changing hydrologic cycles, and a simple “one size fits all” strategy does not apply here.
• We need to take a long, hard look at risk-based management and incentivize risk reduction.
• We have a flood infrastructure deficit. Uninsured losses take multiple decades to recover.
• Cynthia McHale, Director of Insurance Programs at Ceres, cited recent events as evidence that climate change will be the defining issue of this century. And, nowhere on earth is climate change more evident than in North America.
• Back-to-back droughts in 2011 and 2012 caused $30 billion in crop losses.
• The 2012 estimate for overall losses due to weather catastrophes in North America is $80 billion; however, only $20 billion of that is insured. The brunt of natural disaster recovery will come from federal and state governments—out of the pocket of taxpayers.
• Recommendation for insurers: lead in climate risk analysis; engage in climate policy issues; promote climate risk awareness among customers; advocate for policies that reduce GHG emissions.
• Recommendations for Congress: boost climate change and extreme weather research; promote sound land use and management practices; link federal recovery assistance to climate resiliency planning and investment.
• In the Q&A portion of the briefing, Frank Nutter noted that while Florida has sound building codes, many in the state are unwilling to pay insurance costs that reflect the risk of being in coastal, high-risk areas. He also noted that Congress should focus more of its energy on the National Flood Insurance Program, as that program currently suffers repetitive losses.
• Lindene Patton mentioned that not all impacts of natural disasters are insurable.
• Cynthia McHale concluded with an appeal to the insurance industry: do not pull out of high risk or unattractive markets.

Extreme weather events cost the U.S. insurance industry $32 billion in 2011. The damage caused by Superstorm Sandy is estimated to be between $40-50 billion in New York alone, an enormous cost for governments, insurers, and individuals. The increasing cost of extreme weather events challenges the industry’s ability to help clients manage risk, reducing business development opportunities. In fact, extreme weather events are increasing the number of businesses and homes that are considered uninsurable in the private market, which in many cases leaves government – and, therefore, American taxpayers – liable for the costs and the risks as the “insurer of last recourse.” According to the Insurance Information Institute, the total hurricane-related risk insured by the government has increased 15-fold since 1990 to $885 billion. Incorporating measures that make communities and infrastructure more resilient and disaster resistant will help decrease their vulnerability and provide long-term savings for taxpayers, households and insurers.