Report Shows Carriers Slow on Dealing with Climate Change and its Impact on Premiums

In a report issued by UK fund manager F&C Asset Management, some insurers have been slow to act on climate change and need to develop strategies to deal with the effect of global warming.  
  
"Insurers are currently standing at a crossroads," said Vicki Bakhshi, Associate Director of Governance and Sustainable Investment at F&C, and co-author of the report. "If they don't act they are in real danger of becoming the victims of climate change, subject to ever increasing risks in their investment portfolios and claims that exceed their projections. It doesn't have to be like that."  
  
Due to the growing number of natural catastrophes occurring, insurers are at risk of higher payouts due yet many companies have not factored in the probability of more hurricanes, storms and floods, due to climate change, into their risk pricing, according to the report.  
  
Insurers traditionally insurers rely on data based on what they paid out previously to determine what they should charge in the future. However, according to the F&C, climate change has added a significant element to the equation and the past is increasingly an unreliable guide to the future.   
  
"To the extent that risk may be systematically under-priced, the report argues this could significantly impact the profitability of the sector, and have implications for capital adequacy requirements," the fund manager said.  
  
While some insurers have been encouraging customers to reduce the risks they face, for example by reducing premiums for those who install flood defenses on their homes, it has been more common for insurers to simply withdraw from high risk areas forcing the state to step in, F&C said.   
  
Following a string of devastating hurricanes to hit the southeastern United States the state of Florida has now become the largest provider of residential insurance there as several insurers have withdrawn from the market, F&C noted.  
  
The insurance industry, according to the report, needs to engage more with legislators to find a solution to the issue of offering insurance as the risk increases due to climate change.   
  
Also in line with what the F&C is stating is David Crichton, a freelance consultant and researcher on climate change impacts and insurance, and visiting professor at the Benfield Hazard Research Centre at University College London. In a talk to an audience of risk managers at the Institute of Risk Management annual risk forum in Hatfield, England, he stated that risk managers should think about climate risk in the way that catastrophe modelers think about it— by breaking it down into its component parts, namely hazard, exposure and vulnerability.  
  
“As the climate changes, there will be more and more uncertainty," said the professor.  
  
Crichton particularly focused on wind and rain in the United Kingdom and said that in the last 50 years the number of windstorms over the United Kingdom had doubled. He warned that "we are making ourselves more vulnerable to climate change."  
  
He pointed to properties built after 1971 being more vulnerable to wind, and the fact that 11% of new houses were built in flood risk areas.  
  
"Do we want high economic growth to compensate for damage, or do we want good stewardship and effective risk management?" Crichton asked.