urricane Ian’s devastation of the U.S. Gulf Coast brings a stark reminder of the need for insurers to rethink their approach to insuring against the risks posed by climate change. The storm’s aftermath is pushing already strained insurers in Florida to the brink of collapse, with losses estimated to reach as high as $50 billion. Even with the state’s $20 billion guaranty fund to help backstop these losses and property premium rates three times the national average, many Florida insurers are at risk of insolvency. Ian has demonstrated that rate increases and restricted coverage are not enough to protect insurer’s bottom line from this new climate reality. Since January 2020, at least a dozen insurance companies in Florida have gone out of business and almost thirty others are on the Florida Office of Insurance Regulation's "Watch List" because of financial instability. Price increases and lack of coverage have caused more than 400,000 Florida consumers to go uninsured according to the Insurance Information Institute. Add to this unsavory mix that Florida has the highest litigation rate for insurance related claims and the result is an erosion of public trust in an already opaque industry. Unless insurers change their approach, the market is ripe for would-be disrupters to step in.
If insurers want to stay in business, then they must make combatting climate change part of their business model. While the debate over how to build a climate resilient tomorrow rages across corporate and government halls of power, far less attention is paid to the need to build climate resiliency into contemporary governance. To do so, insurers must think beyond simply decarbonizing their portfolios and aim to revamp their coverage offerings for today’s climate realities—or risk irrelevance for key coverage lines. Insurers need to recognize that the threat of climate change is not in some distant future—it is here and now. A new approach is needed to address climate risks and protect insurer profitability. This needs to go beyond traditional approaches of rate increases and government subsidies to keep high risk territories and coverage lines accessible. Instead, insurers can leverage their position to limit losses from extreme weather events and build climate resiliency. The dangers of not responding now would be catastrophic.
The Cost of Doing Nothing
Inaction represents a greater cost than implementing new insurance underwriting requirements. Left to carry the expense on their own, insurers will continue retreating from these high-risk lines of business altogether and leave the most vulnerable to fend for themselves. The Intergovernmental Panel on Climate Change (IPCC) estimates that in the next decade alone, climate change will drive 32-132 million people globally into extreme poverty. This is due to the knock-on effect climate related risks have on displacement, financial ruin, and food insecurity. Creating greater insurance access can expedite recovery efforts to restore livelihoods and rebuild critical infrastructure—allowing people, communities, and economies to rebound more quickly.
Property and casualty business represents over $700 billion in premiums for the insurance industry in 2021. Yet this class of business was barely profitable with a combined ratio of 99.5%. While this cannot be solely attributed to climate change, given the large block of property and physical assets insurers hold it was certainly a factor.
Leveraging the Power of Insurance
The insurance industry holds a great deal of sway on consumer behavior as coverage is often a prerequisite for investment. Given this role, insurers can dictate investment, operational, and structural parameters of projects through their willingness to underwrite different types of risks or not. By pushing to align insurance requirements and regulations, like climate resilient building codes, insurers can influence consumer behaviors. promoting the adoption climate resilient codes on a wider scale. This has been done before when insurers greatly influenced the creation of stricter fire codes at the turn of the 19th century via the National Board of Fire Underwriters. At a time when large cities used wood as the dominant construction material in their expanded and electrified, insurers started requiring standardized and stricter fire codes to limit losses. This ultimately led states and municipalities to follow suit as many buildings were uninsurable. This model shows how insurers can wield significant influence and behavior changes to help uphold public safety as well as loss containment. A similar framework must be adopted today.
More frequent and severe extreme weather events continue to unfold with large economic losses. While the risks posed by climate change today remain insurable, they may not be for much longer. Without insurance, much of the economic system and social safety net that we rely on cannot function. Insurance access is key to a healthy economy, ensuring both businesses and governments can facilitate capital investments, maintain operations, and recover from costly disasters in timely fashion. If we do not rethink our collective approach to climate change, this insurance access could quickly dry up. Insurers must go beyond traditional pricing models and revamp their underwriting guidelines to meet today’s risk landscape.
Using Insurance to Build Back Better
If carriers want to keep these lines of business profitable, they must engage with policy makers to develop new regulatory standards by which buildings, cities, and other developments are built. Insurers can require stronger guidelines for building codes and align them to their risk models in order to limit losses. Enacting these codes could motivate developers by reduced insurance premiums while concurrently reducing the burden on taxpayers for disaster recovery.
Insurers must also rethink the risks they are willing to underwrite. This becomes even more critical in post-disaster reconstruction where questions of build back, build back better, or build back at all should be contemplated by insurers, policy makers, and citizens alike. If rebuilding, then building back better must be a priority—where regard for nature’s disaster defenses should be implemented to the highest degree, rather than sacrificed for aesthetics.
One way to build back better is to support the development of natural defenses to reduce risk. For example, barrier reefs and mangroves offer clear advantages in abating storm surge and coastal flooding. Some innovative insurers have started creating incentives for developments and building projects that leverage these types of natural defensive systems to reduce flooding and property damage in extreme weather events. Developers who keep or implement these types of proactive natural defensive barriers are rewarded not only coverage access, but in some cases enhanced pricing as well. By reducing the risk profile, insurers can better manage expected losses and expand their underwriting appetites. Enforcing this type of “natural defense” inclusion into building codes and city planning will help yield more resilient communities and reduce losses. Environmentally focused underwriting is rare, but it should not be.
Climate resilient investments could reap large economic rewards. In addition to job creation, an analysis from the National Institute of Building Sciences calculates that climate-resilient construction can lead to as much as $11 in savings for every $1 invested in reinforced building codes. Proactive mitigation steps in infrastructure and building construction reduces damage to property and recovery costs while minimizing productivity disruptions. Insurance companies can leverage their unique positions to encourage building improvements and strengthen regulations. Not only could this increase their profitability, but, more importantly, it saves lives.
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Ensuring Our Future Requires Insuring Today
Photo by Kelly Sikkema via Unsplash.
November 8, 2022
As climate-related disasters increase, insurers need to rethink their approach to insuring against the risks posed by climate change. If insurers want to stay in business, they must make combatting climate change part of their business model, writes Risk Cooperative CEO Andres Franzetti.
H
urricane Ian’s devastation of the U.S. Gulf Coast brings a stark reminder of the need for insurers to rethink their approach to insuring against the risks posed by climate change. The storm’s aftermath is pushing already strained insurers in Florida to the brink of collapse, with losses estimated to reach as high as $50 billion. Even with the state’s $20 billion guaranty fund to help backstop these losses and property premium rates three times the national average, many Florida insurers are at risk of insolvency. Ian has demonstrated that rate increases and restricted coverage are not enough to protect insurer’s bottom line from this new climate reality. Since January 2020, at least a dozen insurance companies in Florida have gone out of business and almost thirty others are on the Florida Office of Insurance Regulation's "Watch List" because of financial instability. Price increases and lack of coverage have caused more than 400,000 Florida consumers to go uninsured according to the Insurance Information Institute. Add to this unsavory mix that Florida has the highest litigation rate for insurance related claims and the result is an erosion of public trust in an already opaque industry. Unless insurers change their approach, the market is ripe for would-be disrupters to step in.
If insurers want to stay in business, then they must make combatting climate change part of their business model. While the debate over how to build a climate resilient tomorrow rages across corporate and government halls of power, far less attention is paid to the need to build climate resiliency into contemporary governance. To do so, insurers must think beyond simply decarbonizing their portfolios and aim to revamp their coverage offerings for today’s climate realities—or risk irrelevance for key coverage lines. Insurers need to recognize that the threat of climate change is not in some distant future—it is here and now. A new approach is needed to address climate risks and protect insurer profitability. This needs to go beyond traditional approaches of rate increases and government subsidies to keep high risk territories and coverage lines accessible. Instead, insurers can leverage their position to limit losses from extreme weather events and build climate resiliency. The dangers of not responding now would be catastrophic.
The Cost of Doing Nothing
Inaction represents a greater cost than implementing new insurance underwriting requirements. Left to carry the expense on their own, insurers will continue retreating from these high-risk lines of business altogether and leave the most vulnerable to fend for themselves. The Intergovernmental Panel on Climate Change (IPCC) estimates that in the next decade alone, climate change will drive 32-132 million people globally into extreme poverty. This is due to the knock-on effect climate related risks have on displacement, financial ruin, and food insecurity. Creating greater insurance access can expedite recovery efforts to restore livelihoods and rebuild critical infrastructure—allowing people, communities, and economies to rebound more quickly.
Property and casualty business represents over $700 billion in premiums for the insurance industry in 2021. Yet this class of business was barely profitable with a combined ratio of 99.5%. While this cannot be solely attributed to climate change, given the large block of property and physical assets insurers hold it was certainly a factor.
Leveraging the Power of Insurance
The insurance industry holds a great deal of sway on consumer behavior as coverage is often a prerequisite for investment. Given this role, insurers can dictate investment, operational, and structural parameters of projects through their willingness to underwrite different types of risks or not. By pushing to align insurance requirements and regulations, like climate resilient building codes, insurers can influence consumer behaviors. promoting the adoption climate resilient codes on a wider scale. This has been done before when insurers greatly influenced the creation of stricter fire codes at the turn of the 19th century via the National Board of Fire Underwriters. At a time when large cities used wood as the dominant construction material in their expanded and electrified, insurers started requiring standardized and stricter fire codes to limit losses. This ultimately led states and municipalities to follow suit as many buildings were uninsurable. This model shows how insurers can wield significant influence and behavior changes to help uphold public safety as well as loss containment. A similar framework must be adopted today.
More frequent and severe extreme weather events continue to unfold with large economic losses. While the risks posed by climate change today remain insurable, they may not be for much longer. Without insurance, much of the economic system and social safety net that we rely on cannot function. Insurance access is key to a healthy economy, ensuring both businesses and governments can facilitate capital investments, maintain operations, and recover from costly disasters in timely fashion. If we do not rethink our collective approach to climate change, this insurance access could quickly dry up. Insurers must go beyond traditional pricing models and revamp their underwriting guidelines to meet today’s risk landscape.
Using Insurance to Build Back Better
If carriers want to keep these lines of business profitable, they must engage with policy makers to develop new regulatory standards by which buildings, cities, and other developments are built. Insurers can require stronger guidelines for building codes and align them to their risk models in order to limit losses. Enacting these codes could motivate developers by reduced insurance premiums while concurrently reducing the burden on taxpayers for disaster recovery.
Insurers must also rethink the risks they are willing to underwrite. This becomes even more critical in post-disaster reconstruction where questions of build back, build back better, or build back at all should be contemplated by insurers, policy makers, and citizens alike. If rebuilding, then building back better must be a priority—where regard for nature’s disaster defenses should be implemented to the highest degree, rather than sacrificed for aesthetics.
One way to build back better is to support the development of natural defenses to reduce risk. For example, barrier reefs and mangroves offer clear advantages in abating storm surge and coastal flooding. Some innovative insurers have started creating incentives for developments and building projects that leverage these types of natural defensive systems to reduce flooding and property damage in extreme weather events. Developers who keep or implement these types of proactive natural defensive barriers are rewarded not only coverage access, but in some cases enhanced pricing as well. By reducing the risk profile, insurers can better manage expected losses and expand their underwriting appetites. Enforcing this type of “natural defense” inclusion into building codes and city planning will help yield more resilient communities and reduce losses. Environmentally focused underwriting is rare, but it should not be.
Climate resilient investments could reap large economic rewards. In addition to job creation, an analysis from the National Institute of Building Sciences calculates that climate-resilient construction can lead to as much as $11 in savings for every $1 invested in reinforced building codes. Proactive mitigation steps in infrastructure and building construction reduces damage to property and recovery costs while minimizing productivity disruptions. Insurance companies can leverage their unique positions to encourage building improvements and strengthen regulations. Not only could this increase their profitability, but, more importantly, it saves lives.
