After Hurricane Sandy roared across the Northeastern United States, many homeowners on Long Island — even those who escaped the most damage — often lost their property insurance. The same thing happened in coastal Virginia after Hurricane Katrina, which hit hundreds of miles away along the Gulf Coast.
Today, from Florida to Delaware, property insurance near the water is becoming harder and harder to find.
“I’m worried because insurers only stay in markets until they deem them not profitable,” said Mike Kreidler, the Washington State insurance commissioner. “We want these insurers to stay fully in the market.”
This is not exclusively an American phenomenon. As the damages wrought by increasingly disruptive weather patterns have climbed around the world, the insurance industry seems to have quietly engaged in what looks a lot like a retreat.
A report to be released Wednesday by Ceres, the sustainability advocacy group, makes the point forcefully. “Over the past 30 years annual losses from natural catastrophes have continued to increase while the insured portion has declined,” it concluded.
Riskier Business
Damages from weather-related catastrophes have increased, but the share of these damages covered by insurance has been declining, according to a new report by Ceres, an environmental advocacy group.
Estimated annual losses
worldwide from weather-related
natural disasters
$250
In billions of 2014 dollars
200
UNINSURED
INSURED
150
100
50
0
’70
’75
’80
’85
’90
’95
’00
’05
’10
’13
Last year, less than a third of the $116 billion in worldwide losses from weather-related disasters were covered by insurance, according to data from the reinsurer Swiss Re. In 2005, the year Katrina struck, insurance picked up 45 percent of the bill.
This gradual, low-key withdrawal reveals an alarming weakness. Even as the risks of climactic upheaval increase with a warming atmosphere, the industry created to provide for civilization’s first line of defense against disasters is turning tail.
“In the long run,” the Ceres report added, “these coverage retreats transfer growing risks to public institutions and local populations, and reduce the resiliency of communities, which are less able to finance postdisaster recoveries.”
In the first report of this kind, Ceres ranked the preparedness for climate change of the 330 largest insurance firms doing business in the United States, representing about 87 percent of the property and casualty, health and life insurance market.
Using insurers’ responses last year to a climate risk survey developed by the National Association of Insurance Commissioners, Ceres ranked their performance on half a dozen indicators, from how climate change figured in risk-management systems and governance to whether they took into account climate-related risks to their investment portfolios.
The good news is that a few big firms are truly paying attention. The bad news is that there are only nine — including just two American companies, Prudential and the Hartford, and several big reinsurers like Swiss Re and Munich Re.
By contrast, 276 insurers earned “beginning” or “minimal” ratings. “Eighty-five percent of the industry is just starting to develop a plan or really not doing much at all,” said Cynthia McHale, director of the Ceres insurance program, who led the research effort.
For some insurers, apparently, the risks of climate change still seem too distant and abstract. Life insurers must hold very long-term investments in assets like real estate that could lose value sharply because of climate change. Still, Ceres noted, most of them “do not believe they face significant risks.” Similarly, with the exception of Kaiser Permanente, health insurers are ignoring the impact that climate change could have on disease patterns and human health.
Property and casualty insurers have a clearer picture of the huge potential costs they face. CoreLogic, which provides analysis on the property market, calculates that more than 6.5 million homes in the United States are at risk of storm surge damage. Their reconstruction value is $1.5 trillion, or about one-tenth of the annual output of the entire American economy.
What is holding back the insurers on the front line of climate change, it seems, is an entirely different reason: the threat of legal liability.
Lawsuits over climate are popping up. In 2011, the power company AES tried to draw on its contracts with Steadfast Insurance when an Inupiat Eskimo village in Alaska sued it, along with a bunch of coal-burning utilities, a coal producer and some energy companies, because sea ice that formerly protected the village from winter storms was melting.
The state Supreme Court of Virginia ultimately agreed that Steadfast could deny coverage. Other suits for damages have also failed. But that won’t hold liability at bay forever. Munich Re, for instance, says it believes policies covering corporate officers and directors may have to pay for damages stemming from their failure to consider the consequences of climate change in their professional activities.
“Lawsuits are an inevitable part of the American system for determining whether and how to compensate for damages,” the Ceres report noted. “The larger the alleged injuries from climate change, the greater the recovery efforts will be.”
They could quickly add up. In a 2011 report, the United Nations Environmental Program’s Finance Initiative concluded that the world’s 3,000 top public companies were causing about $1.5 trillion a year of environmental damage because of greenhouse gas emissions.
Fears of liability risks seem to be freezing insurers like deer in the headlights. Insurance companies that were already wary of the political risk of wading into the climate change debate have been further chilled by the potential legal liability.
If they start writing policies specifically excluding liabilities related to climate change, could that be interpreted as saying that previous policies did cover them? What if they don’t mention it at all?
“Discussions of liability disclosure occur more openly outside of the U.S.,” said Lindene E. Patton, the former chief climate product officer at Zurich Re, who was a co-author of the American Bar Association’s “Climate Change and Insurance” report two years ago. “In the U. S. anything you say can be interpreted in future litigation.”
Indeed, “there’s a huge reluctance to even use the word climate change,” Ms. McHale, the Ceres expert, said. “Insurance companies did not underwrite or price for climate liability. So their lawyers advise them not to talk about it and not to use the word.”
The quandary for insurance companies, of course, is that they can’t give up writing insurance policies without eventually putting themselves out of business. And walking away from markets as they become too risky to insure is not sustainable. For one thing, as insurers on Long Island discovered after Hurricane Sandy, politicians will try to stop them.
Insurers won’t be able to stay in markets where they can’t align premiums with rising risk. Government regulators must acknowledge this fact. Policy makers must also realize that the enormous subsidies for Americans to build in harm’s way are ultimately counterproductive.
Insurers could play a constructive role in preparing the world for climate change, prodding governments and consumers to take account of rising climate risks. “If we have the ability to affect the rebuild after a catastrophe we can have an impact,” said Tony Kuczinski, chief executive of Munich Re America.
But rather than promoting a better understanding of risk, Ms. McHale notes, American insurers flooded with foreign cash are in a race to take market share from one another.
The biggest risk of all is that the insurance industry fails when it is most needed.
“At some point, sooner or later, there will be a situation where there are much higher liabilities than anybody anticipated,” Ms. McHale warned. “Some companies will have problems.”
So will the rest of us.