Insurance, reinsurance and climate-related risk management

A number of reinsurance companies – the insurers of the insurance firms – have started to address climate change issues, but many still ignore the importance of considering the effects of natural disasters. Ilaria Bertini writes how this lack of long-term thinking might cost them more than they expect.

According to the Insurer Climate Risk Disclosure Survey 2012, commissioned by Ceres, only 23 out of 184 American insurers have effective climate change strategies.

Ceres president Mindy Lubber said, “Every segment of the insurance industry faces climate risks, yet the industry’s response has been highly uneven.

“The implications of this are profound because the insurance sector is a key driver of the economy. If climate change undermines the future availability of insurance products and risk management services in major markets throughout the US, it threatens the economy and taxpayers as well.”

The study has considered insurance companies in three states – California, New York and Washington – where the majority of the market is based.

Ceres explained that extreme weather events have caused huge economic damages for US firms, with Hurricane Sandy alone accounting for a $50 billion loss.

Charlene Leurig from Ceres, contributor to the report, told campaign website Care2, “Many of them are fumbling in the dark, pricing risk without understanding it.” She added that some firms had even expressed sceptical views of climate change.

Thirteen out of the 23 companies that had climate change strategies were based abroad. Leurig said that once companies realise that extreme weather events might harm their operations financially, many decide to move away. This has happened in Florida, for instance.

The report concludes that insurance companies, especially the small ones, should prepare to face climate change consequences for their clients with effective and planned assessments.

The reasons for adopting such strategies, according to the 23 companies analysed, range from issues relating to returns, and how climate change might impact them financially, to clients’ exposure and related reputational benefits.

But while only a few insurers are ready to deal with extreme weather conditions, health problems and other issues related to climate change, some of the biggest reinsurance companies have prepared themselves with focused strategies regarding future climate accidents.

Reinsurers are the investors that provide insurance to the insurance companies, as a form of risk management.

The majority have seriously considered the possible implications of climate change on their business, as they realise that being unprepared might mean they have to face larger losses.

Reinsurers like Munich Re and Swiss Re, leading companies in climate risk management, know that climate change and climate-related disasters are likely to become ever-more frequent and are likely to affect the next generation of investors.

“Swiss Re understands the relationship between climate and natural disaster risk and the societal impact of both”, the Zurich-based firm states on its website.

“We’ve been shaping the global climate agenda through dialogue with our public and private sector partners, cutting-edge research and innovative risk transfer solutions for over two decades.”

At the same time, these companies also often stress the important role that renewable energy might have in the future, with many of the opinion that insurance companies should contribute to the sector’s growth.

Chadbourne insurance and reinsurance group, for example, thinks “while climate change poses potential threats, it also creates vast new business opportunities for insurers and reinsurers.”

Munich Re highlighted in a January report that last year in the US, natural disasters caused $160 billion worth of economic losses.

Board member Torsten Jeworrek said, “The heavy losses caused by weather-related natural catastrophes in the USA showed that greater loss-prevention efforts are needed.”

Although some insurers and reinsurers seem to have made climate-related issues a core element of their risk management, the overall picture emerging from Ceres study shows that a greater effort is needed.

The report concludes by suggesting investors should implement their strategy and consider climate change as a “corporate-wide strategic issue” to be treated by anticipating possible effects of natural disasters.

Big investors, such as reinsurers, should seriously start to improve their climate change strategies. Not only because this would help their clients – and their business – on a long-term perspective, but also because it is the best way to send a clear message to the corporate and institutional world: that climate change does exist and we do have to deal with it.

Further reading:

Insurance industry can help drive renewables, says Swiss Re report

Time to offload the high-risk, low-return carbon assets

From austerity to scarcity: the coming global crisis

Ethical insurance: protection for the days when it goes wrong