Blog Archive

Thursday, October 10, 2013

Can the Insurance Industry Weather Climate Change?

by Joel Makower, Chairman and Executive Editor at GreenBiz Group, October 8, 2013

Let's suspend any putative "debate" over climate change and simply look at the reality of today's weather: it's changing, and not for the better. There have been, and will continue to be, more severe storms, floods, droughts, hurricanes and wildfires. In short, and from a business perspective: more costly disruption.
Business disruption means such things as the unavailability or price spikes of key commodities or supplies, damage to company or key suppliers' manufacturing facilities, loss of power to run facilities, shortages of fuel to power company and employee vehicles, and destruction of key parts or inventory. Oh, and the fact that your customers and employees may be in dire straits. Any of these things could put a company on the ropes financially — and possibly out of business. So, the companies that insure businesses for business disruption would be focused like a laser on the impacts of increasingly unstable weather, right?
Well, maybe.
It’s certainly a topic of discussion, as I learned at last month’s Climate Week events in New York. There was a succession of conversations, meetings and press events featuring companies, policy makers and others eager to strut their climate cred. And more than a few of them actually had some.
I was particularly interested in the subject of business insurance against climate risk: how insurance companies are pushing their corporate clients (as well as municipal ones) to protect themselves financially against severe weather and other manifestations of a changing climate. It’s a topic I’ve been covering for years. (Here, for example.)
This is no small matter. Case in point: Floods in Thailand in 2011 wreaked havoc on several industries, causing more than $45 billion in economic damages and losses due to flooding, according to the World Bank. The manufacturing sector took the biggest hit, since seven major industrial estates (groupings or industrial facilities in a synergistic manner) were inundated by as much 10 feet of water during the floods. Disruptions to manufacturing supply chains affected regional automobile production and caused a global shortage of computer disk drives, which lasted through much of 2012.
These things hit insurers hard. Zurich Insurance Group, the biggest Swiss insurer, downgraded its revenue targets after "natural catastrophe losses cut second-quarter profit by 27 percent," reported Insurance Journal in August. And it's not just hurricanes. Strong thunderstorms and rain across the greater Toronto metropolitan region in July caused significant flooding and power outages to the tune of US$1.41 billion, about half of which was covered by insurance, according to The Royal Gazette.
"Nowhere in the world is the rising number of annual natural catastrophes more evident than in North America," according to Severe Weather in North America, a 2012 report (download) published by reinsurance giant Munich Re, which insures other insurers, thereby limiting the loss any single insurer would experience in case of disaster. "This increase is entirely attributable to weather events, as there has been a negative trend for geophysical events."
Suffice to say, insurers are concerned. “As experts on risk, everything we see points to the fact that climate change is something we simply cannot ignore, and reducing emissions is essential,” Philip K. Ryan, chairman of Swiss Re America, told the audience at Climate Week's opening ceremony in Midtown Manhattan. He noted that last year, severe weather cost the global economy $160 billion, $70 billion of which was covered by insurance.
A week earlier, his company — like Munich Re, a large Swiss reinsurer — issued a reportranking cities under threat of natural disasters. New York was identified as the U.S. city most exposed to storm surges, with just over a million people at risk. (China’s Pearl River Delta ranked No. 1 globally, with 5.3 million people said to be in harm’s way.) “Around the [United States], there's approximately $10 trillion of insurable assets along the coasts,” Ryan told the Climate Week audience. “The vast majority of those assets, and assets everywhere in this country, are designed to withstand climate events of the past, not climate events of the future.”
This is becoming painfully obvious to business — or, at least, to some businesses. As the Center for Climate and Energy Solutions, or C2ES, put it in Weathering the Storm: Building Business Resilience to Climate Change (download), issued in July:
Companies and their stakeholders — governments, employees, communities and customers — are increasingly concerned about the costs associated with more frequent and intense floods, droughts, hurricanes and wildfires. Many companies are taking steps to begin to enhance their resilience to these growing risks. However, companies traditionally have planned based on past weather events, and few have attempted to integrate the increasing risks associated with the changing climate into their planning and operations. Initial efforts to do so suggest that barriers and uncertainties often stand in the way, preventing companies from achieving resilience against the rising risks of climate change impacts.
The C2ES report provides an in-depth look at the ways multinational companies are beginning to assess and address the risks of extreme weather and other climate-change impacts, and lays out a four-step framework for managing climate risks. At one Climate Week event, C2ES offered up a panel of executives from Hartford Insurance, electric utility National Grid and mining giant Rio Tinto.
At that event I asked, Alan Kreczko, Executive Vice President and General Counsel, The Hartford, if companies are "getting it" — if the conversations his company is having with companies about business disruption from extreme weather are changing. “At the most general level, risk management is getting a much higher degree of attention than it has in the past.” But he acknowledged that climate is just one of many risks — including cybersecurity, privacy and supply-chain risk — that are front and center for companies. As a result, “A lot of companies now have their risk managers in the C-suite,” he said.
So, what’s the opportunity for insurers to help businesses adapt to a changing climate? I sat down with Swiss Re America's chairman, Phil Ryan, to find out.
“The model is on several levels,” he told me. “One is to make sure that they’re incorporating into their business plans and strategies the risk to their business — the risk to their physical plant, their employees, their clients and their overall resiliency — so they’re looking at it from a holistic standpoint and being very serious about it. But the more interesting part is how they’re incorporating it into their business. And then the last thing is advocacy, putting their name behind it, saying they take it seriously, that it’s important to them, which is what Swiss Re has done.”
This isn’t easy to do, as Mark Way, who heads sustainability for Swiss Re Americas, explained. “You model climate change in different ways because there’s still such uncertainty out there. I mean, no one’s saying it’s not going to happen. We just don’t know if it’s one feet or six feet sea-level rise, so you model it in scenarios.”
As customers of the computer disk-drive industry learned in Thailand, most companies aren’t yet doing scenario planning around extreme weather events.
So, what role can insurers play in helping companies avoid such calamities in an increasingly volatile world? “What we basically do as a company after every major event, we look back and ask, 'How well did we do in assessing it, how well did we do in predicting it, and were the models accurate,'” said Way. “A lot of industries in general got quite a surprise because you suddenly realized that supply chains are a big part of this question about tackling climate risk. You can’t tackle climate risk within the perimeter walls of your premises. You’ve got to think beyond that. Integrating climate risk considerations into your risk management strategies is essential.”
Taking a backwards look may not seem particularly proactive, but it’s the way insurance companies — which, after all, are built around statistical probabilities — design their products. But companies may need other tools to adapt to a changing climate. In his Climate Week comments, Swiss Re’s Ryan noted that, “There's an enormous opportunity to help our clients and develop new, innovative ways to manage the financial impact when severe weather strikes.”
Ryan is also excited about where the whole business of climate change is headed. “We’re going to start to see some significant IPOs and significant companies that are making the whole climate change agenda come alive from an economic standpoint,” he told me. “I think the quality of the dialogue even in Washington is gradually making some progress. And then you have a number of fairly significant people who have really locked in on this issue, and they’re putting their shoulder behind it and are going to make a difference.”
That’s far more optimism than I was expecting to hear from someone whose checkbook no doubt quivers every time another Atlantic hurricane is bestowed a name.
The opportunities at the intersection of insurance and climate change seem to be moving slowly. As I left New York and reflected on my conversations, I realized that the conversations haven’t changed much in a half a decade or more. A handful of proactive insurers (and reinsurers) understand that climate will change the rules of the game — but it’s just one of several risk factors roiling their clients. There’s risk in inaction, of course, but also in proaction: If you spend too much, too soon to adapt to or mitigate climate risks, you could put your company at a competitive disadvantage. For insurers and their clients alike, things simply aren’t yet bad enough to push climate and extreme weather to the forefront of concerns.
Apparently, it’s going to take billions more in insurance claims before things change.

No comments: