Is Your Insurer Ignoring Climate Change Risk?

Looking back over the last decade, it’s all too easy to recall environmental disasters that left thousands of families homeless.

Worse, after their losses families often found themselves unable to rebuild due to insurance loopholes and ill-prepared catastrophe models.

The most notable catastrophes include Hurricane Katrina and Hurricane Sandy, which caused upwards of $130 billion in direct damage combined – and more than double that in total economic losses.

According to Swiss Re, insurance covered less than a third of the $11.6 billion in global losses from weather-related disasters in 2013.

Looking ahead at climate related exposures, a report by CoreLogic found that more than 6.5 million homes along the U.S. Atlantic and Gulf Coasts are at risk of storm surge inundation, representing nearly $1.5 trillion in total potential reconstruction costs.

As climate change continues, leaving significant uncertainty and risk in how to best prepare properties against such “unforeseen” hazards from Mother Nature, insured parties need to start being more proactive and demanding improved options from insurance companies.

What Can Insureds Do?

Given the lengthy and widespread financial havoc that results from the existing perfunctory policies, we all have a stake in changing the norm.

Among the ways insureds can reduce exposure include: 1) understanding green risk management and 2) successful risk transfer to insurance companies.

However, just last fall, a report from Ceres, the nonprofit sustainability advocate, discovered “a profound lack of preparedness in addressing climate-related risks and opportunities.”

Based on 330 insurer disclosures last year in response to a climate risk survey, the study broke down the answers into a 4-point scale between “minimal” and “leading.” A mere 3% of companies received the top ranking:

• ACE
• Munich Re
• Swiss Re
• Allianz
• Prudential
• XL Group
• The Hartford
• Sompo Japan
• Zurich

Other key findings of the report found that insurers with more than $5 billion in direct premiums had stronger climate risk management practices than their smaller counterparts.

What’s more, only 1-in-10 insurers overall have issued public climate risk management statements articulating their understanding of climate science and it’s implications for their models.

The point is this: insurance companies across the board must not only acknowledge the real threats posited by climate change, but actually change their models and policies to better protect supply chains, buildings, crops and other assets that if left underinsured could eventually succumb to extreme weather scenarios and ultimately end up costing the government significantly more.

So what can be done?

First, ensure that your policies are as sound as possible against climate change risks. Check for gaps in insurance coverage and exposure to events likely to be associated with climate change. Educate yourself on the types of coverage you need for your respective assets and call your insurer to discuss the options.

Second, consider advocating for stronger insurance requirements through the federal government. The risks involved in inadequate insurance policies are momentous and if we fail to act and be prepared, the consequences will continue to be dire.