Ask Risk Managers

The world’s largest insurance companies are united in their concern that climate change risks the health of their industry and the global economy.(1),(2),(3)

“The prospect of extreme climate change and its potentially devastating economic and social consequences are of great concern.”
– AIG, Berkshire Hathaway, Prudential, and 63 more companies

They are concerned for good reason – when disasters happen, they foot the bill. In the United States, billion-dollar disasters are increasing and even more are expected with additional warming.(4),(5)

billion-disaster

Source: NOAA

Reinsurance companies, the companies that insure insurance companies, are the ones most actively studying climate because they have the most to lose. Why? Traditional insurance companies are not as exposed to global changes and can manage climate risks by buying reinsurance and similar products.(6),(7),(8),(9) Reinsurers do not have this option. They heavily invest their time and resources to precisely measure present and future risks.

“Climate change is occurring and is already exacerbating hazards”
– Andrew Castaldi, Swiss Re America’s Head of Catastrophe Perils

Reinsurance companies, with hundreds of billions of dollars in assets, are also the only companies that can quantify climate change impacts.(21) Climate risk studies require supercomputers that smaller insurance companies cannot afford.(12),(13) For example, one study of a single flood season in England took nearly six years to complete with regular computers.(14),(15) The short video explains how Munich Re, the world largest reinsurer, studies climate change:

U.S. Taxpayers Absorbing Costs
Insurance companies aren’t the only ones with money at stake. We taxpayers are on the hook too, through federal programs that insure against extreme weather, such as the National Flood Insurance Program (NFIP). What’s the difference between government and industry? Government offers subsidized, below-market rate policies—in part because they rely on decades-old risk information and do not adjust for observed climatic shifts.(16),(18),(19)

“The industry is at great financial peril if it does not understand global and regional climate impacts, variability and developing scientific assessment of a changing climate.”
– Frank Nutter, President of the Reinsurance Association of America (July 2013)

Due to subsidized rates and low industry participation, the federal government is now the largest provider of flood insurance and the program ensures Americans living on the coast. After massive pay-outs from Hurricanes Katrina and Sandy, the program is $24 billion in debt.(20)

national-flood-insurance
Source: FEMA

Today, the flood insurance program is one of the largest government liabilities, second only to Social Security. Unlike Social Security, however, it currently only benefits about 1 in 20 American households.

“If this were a private insurer, it would be bankrupt”
– Dr. Bob Hartwig, President of the Insurance Information Institute, August 2010

Despite overwhelming evidence that current federal flood insurance premiums are unsustainable, efforts to raise rates have been blocked.(24),(25),(26) And it’s not just flood insurance. The federal government also provides subsidized crop insurance, another high-risk insurance market susceptible to climate change.(27) For example, the 2012 drought cut U.S. crop yields, reduced U.S. GDP by 0.4%, and cost taxpayers about $16 billion in insurance claims.(28)

 


 

SOURCES

  1. Business Wire
  2. Bloomberg
  3. Insurance Journal: Climate Change No.1 in Top 10 Risks Facing Industry
  4. NOAA: Extreme Weather and Climate
  5. NASA: Climate Change Effects
  6. MarketWatch
  7. Reuters
  8. S. Government Accountability Office
  9. Smithsonian Magazine
  10. SwissRe
  11. MunichRe
  12. MIT Technology Review
  13. NASA: Data Supporting Science
  14. The New York Times: Mutually Insured Destruction
  15. Rutgers University
  16. Business Insurance
  17. Bloomberg: New NYC Flood Maps
  18. NPR
  19. S. Government Accountability Office
  20. Insurance Journal: How to Encourage Private Flood Insurance
  21. NOAA: State of the Coast
  22. FEMA
  23. S. Census Bureau
  24. AECOM
  25. InsuranceNewsNet
  26. NPR
  27. USDA
  28. The New York Times: Record Taxpayer Cost is Seen for Crop Insurance

GRAPHIC SOURCES

  1. Disaster events – NOAA
  2. NFIP losses – FEMA
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