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Is the Insurance Industry Doing Enough to Address Climate Change?


The increasingly unpredictable weather makes insurance risk modeling a challenge.

While the industry has recognized climate change as a legitimate threat, it does not appear that it is doing much to mitigate it, as least not in America. A 2011 report published by Ceres, a national coalition of investors and environmental organizations, found that only 11 out of 88 US insurance firms had established climate change policies in place and that more than 60% of them did not have formal approaches to assessing climate risks.

In the report, Sharlene Leung, senior manager of the insurance program at Ceres, wrote:
With some important exceptions, the industry is largely focused on the implications of climate change for hurricanes and other coastal events. While this is understandable given the financial risks associated with major hurricanes, recent years have demonstrated that the climatic effects of rising temperatures are likely driving up aggregated losses from smaller, non-modeled events – including perils such as floods, droughts snowstorms, hailstorms, and tornadoes – in ways that severely cut into insurer profitability.

It's not simply that US corporations are all sitting on the fence with regards to climate change. Major companies such as Nike (NASDAQ:NKE), Starbucks (NASDAQ:SBUX), and eBay (NASDAQ:EBAY), for example, have formed a coalition called BICEP, or Business for Innovative Climate and Energy Policy, to lobby for clean energy policies as they worry that climate change will affect the global supply change, and in turn, their businesses.

Business and sustainability journalist Marc Gunther posited in a blog post that insurers in America have been relatively silent on the issue because "they write liability coverage for corporations, including oil and coal companies, which are being sued over climate-related liability."

"Acknowledging climate risk would be a risk for [any] company in an American context," said Andreas Spiegel of Swiss Re, according to Yale Environment 360. "There is the risk that the company or the managers would be held liable for their actions in relation to that."

Ceres' Leung also told the publication that the worry of lawsuits "makes it very much less likely [that they would speak up], and I've heard that explicitly from a number of legal counsels. [Insurers] are being advised to avoid any sort of attribution language between man-made emissions and damages."

The impact of Hurricane Sandy, despite the severity of the damages, will be manageable for insurance companies. "The initial projections of the costs of Sandy I've seen put them only at about half of what the cost of Katrina was, so this is not a Katrina. And even Katrina was not a game-changer for the reinsurance industry," explained Roberts DiUbaldo, a New York-based attorney from Edwards Wildman, whose practice is focused on US and international insurance and reinsurance companies, to Minyanville.

"There certainly will be plenty of claims and losses to be paid, but there's certainly enough capital in the market to respond to these losses," he said.

Still, it remains crucial that the industry starts to factor climate change into its risk pricing because that is the only way to get people to change their behavior, said David Friedberg, CEO of The Climate Corporation, which examines weather data to provide insurance to farmers.

"In certain parts of the country, we're starting to see that farmers can't grow certain crops they have attempted historically. Maybe homes shouldn't be worth $10 million when they're on the coast and every five years the coast will be flooded and the home will be destroyed… Look at the coastline in North Carolina… all the homes are wiped out yet again. How many times does that have to happen before we say we shouldn't be building homes here any more?" Friedberg noted to Wired.

"At some point, you're going to have to have fundamental adjustments in economic value to account for the fact that the climate has changed."

Twitter: @sterlingwong
No positions in stocks mentioned.
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