A new study from the London-based F&C Asset Management Group sounds a warning to the insurance community that the effects of climate change could have devastating consequences.
“The magnitude and frequency of extreme weather events such as hurricanes, floods and wildfires, which could be set to rise further as a result of climate change, puts insurance firms in the eye of the storm,” states F&C’s report -“In the Front Line: The Insurance Industry’s Response to Climate Change.”
In the 20-page study F&C warns that “some insurance companies have been slow to act and urgently need to develop climate change strategies.” It also calls on insurers to engage with policy makers and regulators to bring about systemic changes.
F&C points out that a “stable and efficient insurance sector provides a vital underpinning to society and economic growth by providing a social ‘safety net’ and incentivising individuals and businesses to take intelligent risks.”
The Group argues that the traditional approach to managing risks has become outdated, as it’s no longer sufficient to rely on “historic claims data to price forward-looking risk and determine underwriting requirements.” As the climate changes, the results it produces make “the past an increasingly unreliable guide to the future.”
As a result, risks “may be systematically under-priced,” the report argues. “This could significantly impact the profitability of the sector, and have implications for capital adequacy requirements.”
F&C also points out that “while the impact of climate change will primarily fall on property cover,” there are implications for other areas and insurers’ businesses too. These include:
— Businesses operating in vulnerable areas face the risk of having their operations interrupted;
— health and life insurance may be impacted by climate change increasing mortality and morbidity rates as diseases enter new territories, and
— both liability and professional indemnity insurance could suffer as companies find themselves facing law suits under changing legal regimes and customers sue property developers for damages not covered by policies.
In the UK, which has been particularly hard hit by storms and floods, insurers have adopted two strategies to address the problem. A minority “have been encouraging customers to reduce the risks they face, for example by reducing premiums for those who install flood defenses on their homes.”
However, the majority has responded to the threats by withdrawing coverage from high risk areas forcing the state to step in. F&C sites an example closer to home for this – the withdrawal of a number of U.S. insurers from the Florida property market in the aftermath of the 2005 hurricanes.
The report also notes that “while the insurance industry is the single largest gatherer of capital in the global economy, with $16.6 trillion of assets under management,” it concludes that “many insurers fail to see a link between climate change and the value of the assets they hold”.
There are some bright spots – notably Munich Re and Swiss Re – who have been in the forefront of assessing the future risks the industry faces from climate change. European insurers in general seem to be taking the threat more seriously than their American counterparts.
F&C indicated that the “lack of action in the US, with some notable exceptions such as AIG and Travelers, stems from a combination of weaker acceptance of climate science, limited public policy action, and state-based insurance regulatory regimes that limit the industry’s ability to respond as effectively as it should by, for example, putting pressure to keep pricing low.”
The report concludes with a call to action for individual companies, and for systemic change. It recommends that insurers adopt comprehensive climate change strategies that consider issues including whether the catastrophe models used are currently reflecting underlying climate risk; the scope for products which respond to the opportunities of climate change; the impact on their investment portfolios; and how they are working with public policy makers.
F&C’s report may be dowloaded at:
Source F&C – http://www.fandc.com
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