Insurance in a changing climate

When you are entrenched in conversations about the environment in both your professional and personal life, it is easy to start thinking you’ve heard it all. Until you discover nooks, crannies and even wide-open spaces you’ve yet explored. I had one of those discoveries last week at a colloquium hosted by my employer, in which I learned about the fascinating world of climate change and insurance.

Yes, that’s right, I said insurance is “fascinating.”

The colloquium’s speaker was Peter Hoeppe, the head climate guy at the world’s largest reinsurance company, Munich RE, which is headquartered in Munich. (A reinsurance company is in the business of insuring insurance companies from failing). Based on his presentation, they seem to be leading the way in addressing climate change for the insurance industry (being a company of their size probably also helps them afford a whole department devoted to climate change).

In fact, Hoeppe claimed Munich RE was one of the first alarm-sounders to climate change with a scientific report they published in the 1970s, and they’ve made the issue one of their company’s primary focus topics. A broad sweep of their efforts includes their attempt to make their business operations 100% carbon neutral by 2015, investment in renewable energy, and initiating flagship renewable energy projects–one of them a giant and controversial effort to harness the Sahara desert’s solar and wind energy and transport it all over Europe, the Middle East and northern Africa.

This BBC News broadcast will give you a good, concise introduction to Munich RE’s climate change efforts.

Why would an insurance company care about climate change? It all comes down to the fundamental business of insurance: risk management. Climate change ups the ante on the amount of risk many people face (or will face) on a regular basis, and of course an insurance company would care about a riskier world.

In short, climate change predictions show an increase in the number of severe weather events (storms, tornadoes, droughts, flooding, etc.) in many places around the world. Actually, it seems to already be happening (see graph below).


You see, a warmer atmosphere means more water evaporation, and more water in the atmosphere means a feistier climate. A feistier climate means more natural catastrophe losses for an insurance company to cover, and the more catastrophic losses to cover, the less money an insurance company makes.

After all, their bottom line is still to make a profit–a point Hoeppe even made in his presentation. And a reinsurance company would be especially interested in ensuring insurance companies (terrible wordplay intended) maintain their profits.

To make the situation even trickier (for everyone), numerous other factors exacerbate the risk of loss to climate change-related disasters. Rapid human population growth means there are more people vulnerable to natural catastrophes; an increase in wealth across the world means higher risks of losses (i.e., there is more to lose); and people are increasingly inhabiting risk-prone areas (think Florida), as well as concentrating themselves in cities.

Sorry for all this doom-and-gloom talk, folks. I promise to turn it around. Stay with me.

So, who is going to pay for the losses from these potential floods, storms and droughts? It will depend on where you live and how well-prepared your insurance company is in dealing with climate change.

In some places, especially the risk-magnets, insurance companies are already throwing up their hands and pointing to the property owners. For example, State Farm has has stopped writing new policies for American homeowners in the increasingly disaster-prone states of Florida and Mississippi, according to one report.

Even those who are lucky to be covered may be seeing premium hikes; for some people, this is already a reality. An Environmental Defense report from 2007 (admittedly a little dated now) showed soaring premiums for hurricane-battered coastal states, with rates tripling and quadrupling in some areas. Such hikes could render insurance coverage less or not affordable for many people.

And the world’s most disaster-vulnerable places also happen to be the least developed and least insured.

The world's insured and uninsured. Graphic created by Munich RE.

At least in Europe, some insurers, scientists, and policy people are putting their heads together to figure out what to do about this daunting predicament through collaborations such as the Munich Climate Insurance Initiative (if the name didn’t give it away, this group was convened by Munich RE) and ClimateWise.

The situation in the US, however, is reflective of the general dragging of the feet on dealing with climate change. A survey of insurance companies, conducted by Ceres in 2011, revealed their sluggish response to climate change.

Andrew Logan, the director of Ceres’ insurance program, told the New York Times in February 2012, “The big takeaway from the survey last year is that there is a high level of concern among insurers about the impacts of climate change that is not matched by concrete plans to deal with those impacts. There is a real gap between the risk that’s been identified and plans to address it.”

This same NYT article explains that three states–California, New York and Washington State–are now requiring insurance companies to disclose their plans to respond to the risks of climate change, which seems but a meager baby step forward in light of their European counterparts’ strides.

But back to positive thinking…

Whether you call it “finding solutions” or just “mitigating the cost of the problem,” either way, it’s not a bad thing for global giants like Munich RE to be thinking hard about the riskier world promised by climate change and to be trying out some solutions. We can hope more companies will continue joining them at the drawing board and on the battlefield.

(Insert disclaimer: I claim no expertise in insurance. In fact–and somewhat embarrassingly–I had never given the idea of insurance a whole lot of thought before writing this post. So if you notice any major conceptual holes, I blame my lack of knowledge and/or desire for brevity.)

Further reading

Case study on Munich RE by the Canadian National Roundtable on the Environment and the Economy

Insurance payouts point to climate change,” ScienceNews, 4 January 2012

Why the insurance industry gets climate change,” The Guardian, 28 June 2011

Can the insurance industry survive climate change?CSRWire, 8 June 2011

Insurance in a climate of change,” Science Magazine, 12 August 2005

2 Comments

Filed under Environment

2 responses to “Insurance in a changing climate

  1. Missy

    Cool post! So I have to ask – what is it like living in a country that actually acknowledges climate change and is making plans for it? Does it make you more hopeful?

    • Thanks Missy! Regarding your question: I actually can’t say I have been here long enough yet to get a good feel for public attitudes and beliefs about climate change. As I was in the States, I am more or less surrounded by people who think and care a lot about climate change already, so I have not noticed much of a difference. There’s much more I need to learn about how Germany is addressing climate change, as well as what Germans think about it. But you have planted a seed for a potential future post. 🙂

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