Chubb’s Greenberg to WSJ: The Problem with Government Flood Insurance

Now, insurers are braced to see what this year's Atlantic hurricane season will bring. August, September and October are often the costliest months.

Chubb Ltd., one of the world's biggest insurers of businesses and known for its coverage of the personal property of the affluent, accounted for $2.76 billion of the payouts. But its chief executive, Evan Greenberg, says there was no hand-wringing at the company about the costs-the losses were within risk-management expectations. For the full year, Chubb still posted net profit of $3.9 billion.

Still, Mr. Greenberg has big concerns about the increased frequency and severity of natural catastrophes. In his annual letter to shareholders earlier this year, he said, "The evidence of climate change is immediately apparent, profound and disturbing." In speaking out, he put Chubb among other multinational insurers that are giving a higher profile to concerns about extreme weather events.

Mr. Greenberg, who has more than four decades of experience in the property-casualty insurance industry, says the risk environment is becoming more complex, due both to nature and man-made activity: climate change combined with people's growing preference for homes near coastlines.

He believes these risks are exacerbated by government policies that subsidize development and shield people from the true cost of their living choices. In particular, he advocates for changes to the federal National Flood Insurance Program, including a bigger role for the private sector in underwriting flood risk.

For decades, insurers wanted no part of this risk, which is why the government got into the business in the 1960s. But some insurers now have risk modeling and mapping capabilities that make them more able to shoulder responsibility, Mr. Greenberg says.

Mr. Greenberg spoke with The Wall Street Journal about extreme weather and the changes he would like to see in the government program. Here are edited excerpts of the talk.

WSJ: Would you elaborate on your comments about evidence of climate change as "apparent, profound and disturbing"?

MR. GREENBERG: Climate change shows up in rising sea levels and in large storms. Patterns of drought, shorter winters and more evaporation are other examples of extreme conditions. There is more evidence right now that hurricanes contain more moisture and are increasing in intensity more rapidly. For example, going from Category 1 to Category 5 in hours. Houston experienced three one-in-100-year floods in 18 months.

WSJ: How does climate change impact your operations?

MR. GREENBERG: Total insured losses globally in 2017 from natural catastrophes are the highest on record and the third year since 2005 with $100 billion or more of aggregate industry catastrophe losses. At Chubb, our claims team handled more than 74 catastrophes globally last year, which generated 31,000 claims. There were events where industry modeling performed reasonably well, and other events such as the California wildfires that included a fair amount of nonmodeled or poorly modeled loss. California, for example, experienced the largest wildfire in its history.

We understand the increased frequency and severity of natural catastrophes is at least in part linked to climate change. We take on the risks of our customers-from fire, water and other perils. That's exposure, and our job is to understand it. By doing that, we are able to structure, price and assume risk. Any change to the external environment, including more extreme weather, impacts exposure. From a risk point of view, it doesn't matter if the exposure is man made or natural.

WSJ: What do you do to better understand this evolving exposure?

MR. GREENBERG: We invest to continually upgrade and refine our modeling and risk-management tools for catastrophes. We're using aerial imagery, modeling and drones to validate flood footprints and assess the impact of storms. We have an enterprise risk-management team with some very smart people, including Ph.D.s, mathematicians, rocket scientists and climatologists.

WSJ: Many insurers see climate change as a growth opportunity, right?

MR. GREENBERG: Society has been urbanizing and concentrating exposures along the coasts and other flood-exposed areas. Beyond rising physical-property exposures, there are rising economic and social exposures, and all of that means opportunity for insurance.

WSJ: Does Chubb have the ability to reprice or otherwise modify its contracts annually to adjust for climate changes?

MR. GREENBERG: Contracts are annually renewable but the ability to reprice depends on the kind of coverage and the jurisdiction. In the United States, making changes in pricing personal lines coverage is subject to a regulatory process. You can't just do it at the drop of a hat. There are regulatory constraints on your ability to reduce exposure or to manage exposure differently. In the commercial-lines business, you can reflect the price of the exposure more quickly, and you can manage exposures on a more nimble basis. But you're not looking to change your portfolio on a seasonal basis. Changes generally evolve over time.

WSJ: Will state insurance departments approve the large rate increases that insurers may feel necessary for homeowners if extreme weather leads to higher claims costs?

MR. GREENBERG: For insurance lines that require filing rates with state regulators, premium increases are based on evidence of loss. You have to be able to justify the rates you charge customers. Some jurisdictions understand this and balance the needs of their constituencies. And some, for politically expedient or populist reasons, choose to ignore the need to raise prices, and I think that's ultimately not in the interests of their constituents. When we can achieve an adequate rate, which we can in most instances, we are amenable to both maintaining and increasing our exposure. Where we can't, we will shrink our exposure.

WSJ: You've been outspoken about man-made risks such as the concentration of exposures in coastal areas, and you've said you think the government's National Flood Insurance Program contributes to that by underpricing policies.

MR. GREENBERG: People want to live near water. Property values accumulating along coasts, along with the increasing size of the population, are an evolving problem. The rise of sea-level temperatures and water levels increases the exposure. The government under the NFIP charges an inadequate rate in most instances. It underprices the cost of risk. It incents people to live in places they otherwise wouldn't because they don't pay the right price to live with that risk. And it disincents government from putting money toward infrastructure to mitigate exposure to flood.

There is a better way. Where you recognize the right rate to the exposure, that creates responsible behaviors at both the public and private level that will drive society's behavior in better directions.

WSJ: What do you think should happen?

MR. GREENBERG: The NFIP is deeply in the red, and it crowds out the private sector from playing a greater role in flood insurance.

Our country requires a more comprehensive solution that includes the expertise and capacity of private insurers. The science around flood insurance has improved. We have modeling and geomapping capabilities today that we didn't have a decade or two ago. The private sector would charge an actuarially sound rate-that's to everyone‘s advantage because it brings stability to the system. There is still a role for the government to play to serve those who are less fortunate and have an affordability problem but cannot move. The government should subsidize the cost for those people. That's a societal decision. And it's the right decision.

It will take time to develop a private-sector market. The government ought to maintain a role as reinsurer of last resort for extreme events.

[The NFIP says that the majority of its policies charge premiums that fully reflect possible flood events. In a statement, NFIP Chief Executive David Maurstad said that the government is "currently redesigning the rating methodology" to improve it with additional risk data and commercial catastrophe models, with new rates beginning in 2020.]

WSJ: What is the nature of your current flood-insurance business? How big is it?

MR. GREENBERG: Flood is excluded in standard homeowners' policies. Our clients buy government-available flood insurance, and in many instances that policy is underpriced. Those who want and need additional coverage may buy excess protection from us. What is clear is this: If we cannot charge the right rate for the risk, we're not interested in providing coverage. As a point of interest, many commercial insurance policies that we offer include flood coverage.

WSJ: Does Chubb itself want to play a greater role in flood insurance?

MR. GREENBERG: Chubb would be interested in expanding our role in flood insurance, as I'm sure others in our industry would. We would be willing to write substantially more coverage if the government allowed private companies to charge an adequate, actuarially sound rate that is matched to the risk.