United States: Report Connects Climate Change With Increased Insurer Payments And Decreased Insurer Financial Health

Last Updated: November 20 2012
Article by Charles Hungerford
Most Read Contributor in United States, September 2019

The investor advocacy group Ceres released a report in September 2012 that outlines concerns about the future cost and availability of property insurance, and the financial health of property and casualty insurance companies, due to worsening adverse weather conditions. The report, entitled "Stormy Future for U.S. Property/Casualty Insurers: The Growing Costs and Risks of Extreme Weather Events," recommends various actions that can be taken by insurance companies and others to address the concerns. Ceres is a coalition of investors, companies, and public interest groups that promotes sustainable business practices.

The report follows a Ceres study issued in September 2011 that also focused on the insurance sector. As we previously discussed in The Climate Report, "Climate Risk Disclosure by Insurers: Evaluating Insurer Responses to the NAIC Climate Disclosure Survey" analyzed responses by 88 insurance companies to a climate risk survey conducted by the National Association of Insurance Commissioners and concluded that most insurers only marginally considered climate risk in their business models and risk assessments.

The outlook for insurance companies has continued to decline since 2011. The report indicates that extreme weather events cost U.S. property/casualty insurers more than $32 billion in losses in 2011. According to a 2012 report by crop risk insurance experts at the University of Illinois, publicly owned crop insurers are expected to pay losses of about $18 billion due to droughts. Violent storms in 2012, including the series of intense storms, known as a derecho, that struck the eastern U.S. in June and "Superstorm" Sandy that struck the Mid-Atlantic coast in November (after the Ceres report was issued), can also be expected to result in substantial payments by insurers. As a result of these weather-related events, payments by insurers in 2012 may exceed the $32 billion experienced in 2011.

The report finds that the value of insured losses due to weather has been trending upward over the past 30 years. Losses from excessive precipitation during 2008–2011 were the highest on record. Average annual winter storm losses have nearly doubled since the 1980s. Since 1980, wildfires burned the highest amount of acreage in 2005, 2006, and 2007, and in 2010 wildfires caused more than $1 billion in damage.

Impacts on Insurers

According to the report, a variety of factors are adversely affecting insurance companies, including low interest rates, capital market volatility, and slow economic growth, as well as an additional significant factor—the weather. Both total economic losses as well as insured losses have risen significantly from 1980 through 2011. The report explains the upward trend as largely due to the growing value of assets damaged, growth of urban areas, and the impacts of increasingly frequent and unpredictable severe weather events.

The report states, "As a result of the costs of extreme weather, property/casualty industry net underwriting income (defined as net premiums earned less incurred losses, expenses, and dividends to policyholders) was a negative $34 billion (equal to approximately 6 percent of year-end policy holders' surplus)." The report also indicates that the overall profitability of the property/casualty insurance sector has significantly lagged behind other industries, with the return on equity for all Fortune 500 companies reportedly exceeding that of the property/casualty sector in every year since 1994.

Impacts on Insureds

Increasing weather-related losses are affecting the affordability and availability of property insurance. The report indicates that major insurance brokers saw property insurance rates for catastrophe-exposed risks increase in the range of 10 to 20 percent during the first quarter of 2012. In addition, homeowners in wind-exposed areas are seeing rate increases in the range of 5 to 12 percent.

Ceres's Recommendations

One of the reasons for the adverse financial conditions discussed in Ceres's new report may be the conclusion reached in its 2011 analysis—most insurers are giving insufficient consideration to climate risk in their business models and risk assessments. According to the report, "many industry observers describe climate change as having the potential to undermine insurers' prevailing business models and risk management practices," and actuarially based insurance pricing and industry diversification models are being challenged by climate change.

The report concludes that insurers need to better understand and anticipate changes in climate and weather extremes so they can adapt their pricing accordingly and promote effective risk management strategies to customers. Among its other recommendations, the report recommends that insurers develop and use catastrophe models that anticipate the probable effects of climate change on extreme weather events, and that they update insurance pricing and underwriting of risks to reflect changes in extreme weather impacts on property damage loss trends.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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