How is climate change impacting the insurance industry?

Risk is the insurance industry’s nemesis. 

It’s managed with the not-so-secret weapons of probability and catastrophe models. But climate change is adding a whole new set of complications to those models. As the cumulative effects of climate change grow, so do the uncertainties and bottom-line implications.

So how concerned should we be? 

In one 2019 survey, 22 percent of 267 actuaries identified climate change as a top emerging risk. By comparison, in 2018, only 7 percent had climate change as a top emerging risk. The survey, published by the Joint Risk Management Section and two other actuary organizations, also named climate change as the number one combination risk. It also tied for first as a top current risk, along with cybersecurity issues.

Is it on our radar?

Chris Hackett, American Property Casualty Insurance Association’s (APCIA) senior director of policy and research, said the industry is monitoring the issue.  

In fact, the insurance industry as a whole has been out front when it comes to sounding the climate-change alarm, he said. “This industry includes companies that have been some of the earliest global leaders in warning about growing climate risk and recommending actions to adapt and mitigate.” 

“Some advocates want us to do much more, such as dramatically changing investing and underwriting practices,” he said. 

“But insurers and regulators are generally cautious in order to avoid unintended negative effects on cost, competition, and financial stability. Insurers differ significantly in their business models and risk profiles — a diversity which is a strength, not a weakness.”  

Grinnell Mutual is keeping a close eye on the threats posed by climate change. 

In the National Association of Insurance Commissioners’ Climate Risk Disclosure Survey, which maps how insurers assess and manage risks related to climate change, Grinnell Mutual reported that it regularly monitors “published research papers, Intergovernmental Panel on Climate Change (IPCC) reports, catastrophe model literature, industry presentations, and congressional testimony on the topic of climate change and how it might impact Grinnell Mutual’s business and policyholders.”  

Additionally, Grinnell Mutual has appointed a committee tasked with Enterprise Risk Management, a process that monitors risks, including climate change. The committee especially focuses on how weather patterns affect policyholders’ claims experience.

Extreme weather patterns

It is a point of fact that the frequency and severity of extreme weather events has increased in the past 10 years. Ron Nott, Grinnell Mutual assistant vice president of Direct Claims, says there’s been an uptick in the frequency and severity of claims for personal auto business, which has been driven in large part by heavy snows. The category with the highest frequency of claims per policy was Direct Home-Guard, also attributed to snow load.  

Glenda Blumer, a manager in Claims said, “We have seen extreme weather patterns this year, starting in February. The challenge is that each of our states can be on the receiving end of the storm at any given time. This year began with  the heavy snow, collapse, and ice dam claims. Then torrential rains followed. Now, we have wind and hail losses.” 

Recalculating models 

These extreme weather patterns are creating a challenge to traditional catastrophe models, which have been built from databases of weather events going back decades. However, as extreme weather events become more prevalent, the decades of accumulated data that served as the basis for these models are no longer accurate predictors. Instead, scientists and researchers are turning to more recent occurrences to create new models. 

Matthew Schulte, director of Strategic Insights, is part of Grinnell Mutual’s Emerging Issues committee. He notes that the new information available is unprecedented and invaluable. Technology and extensive record-keeping practices add strategic weapons to the arsenal of information. “You’ve got new sources and new data coming in the door every day,” Schulte said. “We now know things such as how fast the wind blows in a certain ZIP code, or what the typical roof shapes and conditions are for a specific area.”  

All that data can help with risk mitigation, he said. “If we have that information at our fingertips, we can better understand weather patterns and storm frequency, allowing us to better protect ourselves from that risk.” 

Opportunities moving forward 

One byproduct of climate change might be the growth of investment opportunities for insurance companies. New economic sectors are emerging to provide goods and services that reduce greenhouse gas emissions, produce energy-use alternatives, and develop energy-efficiency technology. Increased investment in this sort of infrastructure could be key to offsetting losses from catastrophic events.  

Schulte said climate change might also spur better solutions. “One reaction might be the development of products that are resistant to severe weather. An example is coastal homes today versus ones built in the ’70s and ’80s. Modern homes can withstand winds that destroyed homes in the past.” 

The APCIA’s Hackett said, “There are opportunities for all key stakeholders, including homeowners, insurers, and government officials, to improve pre- and post-disaster planning.”  

He points to the “Natural Hazard Mitigation Saves: 2017 Interim Report,” by the National Institute of Building Sciences, as an example. One of the most notable findings of the study, he said, is that for every $1 spent on federally funded mitigation grants, the nation has saved an estimated $6 in future disaster costs. 

Ultimately, Hackett said, “How seriously we take mitigation and strong building codes going forward will have a direct impact on our success in saving lives and reducing property damage following the next natural disaster.”