Climate change is an existential risk to human life. But, before we get to life as we know it potentially disappearing, this commentary will discuss climate change as a significant risk to insurers and reinsurers. Swiss Re first identified the risk in 1979, and today it is one of the most significant concerns for businesses.
Here are some statistics. In a 2014 study by Munich Re, extreme weather events—such as prolonged droughts, hurricanes, floods, and severe storms—led to $600 billion (US dollars) in insured losses since 1980. This is a 400 percent increase since 1980. Fast-forward to today, where there were $210 billion losses in 2020 and $280 billion losses in 2021 alone. And what happens to the insured losses within those numbers? They get reinsured.
What Is Climate Change?
NASA reports that scientists have found that the climate on earth is significantly changing primarily because of human behavior. Some of the major changes found through observation are global temperature rise, warming oceans, shrinking ice sheets, glacial retreat, decreased snow cover, sea-level rise, declining Arctic Sea ice, extreme events, and ocean acidification. None of these are good things for property or living things.
These are the present-day effects that are changing the risk environment all around us. And that's the good news. The bad news is that many scientists think that these changes are irreversible in our lifetimes. NASA reports that such change will continue through this century and beyond, causing temperatures to continue to rise, frost-free seasons and growing seasons to lengthen, precipitation patterns to change, more droughts and heat waves, hurricanes to become stronger and more intense, the sea level to rise 1–8 feet by 2100, and the Arctic likely to become ice free.
Climate Change around the United States
Here are some findings on how climate change is affecting the various regions in the United States from the Third and Fourth National Climate Assessment Reports, released by the US Global Change Research Program. For the Northeast heat waves, heavy downpours and sea-level rise pose growing challenges to many aspects of life in the Northeast. Infrastructure, agriculture, fisheries, and ecosystems will be increasingly compromised, and many states and cities are beginning to incorporate climate change into their planning.
In the Northwest, changes in the timing of streamflow reduce water supplies for competing demands. Sea-level rise, erosion, inundation, risks to infrastructure, and increasing ocean acidity pose major threats, as well as increasing wildfire, insect outbreaks, and tree diseases are causing widespread tree die-off.
In the Southeast, sea-level rise poses widespread and continuing threats to the region's economy and environment. Extreme heat will affect health, energy, agriculture, and more. Decreased water availability will have economic and environmental impacts.
In the Midwest, extreme heat, heavy downpours, and flooding will affect infrastructure, health, agriculture, forestry, transportation, air and water quality, and more. Climate change will also exacerbate a range of risks to the Great Lakes.
Finally, in the Southwest, increased heat, drought, and insect outbreaks, all linked to climate change, have increased wildfires. Declining water supplies, reduced agricultural yields, health impacts in cities due to heat, and flooding and erosion in coastal areas are additional concerns.
Risk Management and Insurance Response to Climate Change
Think about all of these issues as risk managers. How will they be addressed? How will they be mitigated? What role does insurance and reinsurance play in addressing these risks?
And, of course, we have those who say there is no such thing as climate change. Because of those who refuse to confront the reality of climate change, governmental action is not as aggressive and responsive as the scientists would like. There has been a failure to allocate resources to develop resiliency in affected areas and a failure to develop building codes to mitigate property damage.
Population increases in areas subject to drought, flooding, sea rise, and hurricanes, along with urban density and economic growth in general, have caused insured values to increase due to the accumulation of people and property in zones most affected by climate change. So, when the wind blows and the water flows, the insured damages are much greater in many areas than they would have been a few decades ago.
What Insurance Lines Are Affected?
Property
The obvious line of business affected by climate change is property. The bulk of the insured losses arising from climate change in the last few decades come from property-related losses. These arise from primary perils, which are typically defined as natural catastrophes with low frequency and high severity, like hurricanes/tropical cyclones, earthquakes, and winter storms.
More recently, climate change has caused more insured losses arising from secondary perils, which typically have been defined as natural catastrophes with higher frequency and lower severity, such as strong thunderstorms/hailstorms, floods, droughts, wildfires, landslides, snow, and freezes. These secondary perils have increased severity over the past few decades, causing a greater percentage of insured losses than in the past.
Historical hurricane activity is no longer representative of future hurricane activity because of climate change. There is now stronger storm-surge-driven coastal flooding, increased rainfall, increased intensity, and increased occurrence of rapid intensification, which scientists attribute to climate change. Other marked increases have occurred in wildfires, flooding, tornado and hailstorms, drought, and sea rise. Sea rise is particularly important for property risks because of the corrosion and deterioration of building foundations that are being subjected to seawater.
Liability
While property risks garner the most attention, liability risks have also increased because of climate change. With the transportation infrastructure deteriorating from increased temperatures causing roads to buckle, bridges to expand, and airport tarmacs to melt, transportation injuries are on the rise. Increased temperatures have caused an increase in auto fatalities from tire blowouts, equipment failure, and tired drivers.
Another potentially significant liability risk (as well as a life and health risk) is the unleashing of ancient bacteria and viruses with the melting of the permafrost.
Workers Compensation
Workers compensation losses are also affected by climate change as hotter temperatures cause danger to workers, especially those outdoors or indoors without air conditioning, which has led to an increase in job-related injuries. Warmer temperatures may compromise equipment and the integrity of products in the pharmaceutical, food, and technology industries, causing an increase in products liability losses. Hotter temperatures also will lower worker productivity and attention to critical details.
Sea rise and flooding will cause the release of toxins from Superfund sites and other environmentally hazardous waste buried in landfills near the shore. Reportedly, there are a significant number of Superfund sites near the shore throughout the United States. Additionally, loss of power to certain industries will cause the release of toxins into the air or water. These toxin releases will cause a rise in toxic tort cases.
Professional Liability
Professional lines, including directors and officers liability insurance, is another area that will see an increase in claim activity because of climate change. Because climate change is affecting every industry, the advice given by lawyers that impact climate change issues could result in legal malpractice claims. There are numerous new disclosure and regulatory reporting requirements, including mandatory disclosures in securities offerings that lawyers need to be aware of when advising public (and even private) clients.
Architects and engineers may find themselves on the receiving end of lawsuits blaming them for failing to design and engineer for resiliency and to slow the emission of greenhouse gasses. Accountants and auditors may face claims for the failure to account for financial risks associated with climate change. Importantly, directors and officers are seeing increased claims over the failure to report climate change risks, the failure to address financial risks to shareholders, and the failure to mitigate emissions and incorporate other noncarbon neutral activities.
How Will Climate Change Affect Reinsurers?
All the lines of business discussed above are and will continue to generate increased losses, both in frequency and severity. While some of the insured losses will be held net by the direct writers, a large percentage of these insured losses will be reinsured. This is and will result in increased reinsurance premiums.
Property catastrophe losses are the most obvious and most likely to increase in the near term. Certainly, traditional property catastrophe reinsurance products and capital markets property catastrophe products have been seeing increased exposure over the past few decades.
Reinsurers, however, need to focus on secondary perils as they increase in severity and begin to skew the natural catastrophe models. Reinsurers will need to monitor concentration and accumulation and insist that their reinsureds do likewise. Reinsurers will also need to exercise exposure management on climate risks and push that risk management down to their reinsureds and to the underlying insureds.
The increase in losses arising from climate change will cause a tightening of both the insurance and reinsurance market in certain jurisdictions and for certain lines of business. We already see the property insurance "crisis" in Florida.
Because of the increased exposure, reinsurers and capital markets investors are seeing increased use of capital markets instruments to address property catastrophe losses. Reinsurers may also focus on reinsurance of policies written for industries using renewables instead of fossil fuels to mitigate their exposure to loss.
Reinsurers are increasing their focus on modeling, particularly on secondary risks like winter storms, heat waves, wildfires, and flooding. They are also working on new models for hurricanes because of the new hurricane behaviors resulting from climate change.
Finally, reinsurers are leading the way in engagement in resiliency efforts and are pressing local governments to address building code and land-use planning issues in areas affected by climate change.
Conclusion
Reinsurers are at the forefront of climate change because reinsurers will bear the brunt of the insured losses resulting from climate change. While property catastrophe losses are the most obvious losses expected, almost every line of insurance will be affected by climate change to some degree. This will impact reinsurers and will affect reinsurance premiums and the availability of reinsurance for certain lines of business in jurisdictions most affected by climate change.
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