How Insurance Companies Can Prepare for Increased Climate Change Risk

Published on 8/5/2021 by Bar List Publishing

The impact of climate change has affected every market sector you can imagine. Still, insurers are feeling a two-fold pinch from addressing this risk and the ever-changing industry regulations designed to combat it. To better understand how insurance companies around the United States respond to volatile weather events caused by climate issues, this article looks at how to address these risks as a whole.

Additional Insurance Risk Brought on by a Volatile Climate

As the U.S. continues to experience escalating occurrences of record heat waves, destructive flooding, and millions of acres in forest fires, the insurance market has come under deeper scrutiny by the public and federal regulators. Some national regulation experts believe that the damages our nation could experience from these catastrophic events may exceed the losses suffered in the 2008 financial crisis.

The National Association of Insurance Commissioners (NAIC) Center for Insurance Policy and Research (CIPR) analyzed its Insurance Regulator State of Climate Risks Survey. Since 2010, the NAIC has relied on this survey to help explore current climate risk disclosure data questions developed to provide insight for insurance regulators on the impact of climate change on the industry.

Some of the more notable findings that came of its most recent assessment includes:

  • Most U.S. insurance regulators believe that overall physical, liability and transition risks related to climate change will be increased for the long term.
  • Over half of the surveyed regulators also believe that coverage availability and underwriting assumptions will be seriously impacted by climate change.
  • There is growing concern among state and federal legislators, as well as industry regulators that the overall response by the insurance industry to climate change risks is insufficient.

 With these insights and mounting losses from devastating weather events like the current Dixie fire in California's Butte and Plumas Counties, it's clear that insurers need to take actionable steps in how they approach policy creation as well as protecting their bottom lines.

Challenges Insurance Regulators Face in Assessing Insurers' Climate Risks 

The latest rise in losses for insurer business and investment portfolios highlights how much more prepared carriers need to be when faced with climatic threats. According to the NAIC's study, it was found that:

  • A third or more of regulators didn't know if insurers' financial stability was prepared for fall out from climate-related risks and their impacts.
  • Out of regulators that affirmed insurer awareness of the growing climatic threat to revenue and loss, only four felt carriers were adequately prepared.
  • Of those surveyed, 33% weren't confident if insurers had up-to-date models in place to capture and test climate-based risks.

 These insights make it clear that eventually, better disclosure practices and associated assumptions will be required from the U.S. regulatory agencies. This information also highlights the opportunity for insurers to create better policies regarding disclosing and showcasing risk assessment and mitigation efforts. Doing so would not only provide much-needed reassurance to state and federal industry regulators when it comes to:

  • Surviving the economic impact of severe weather occurrences like hurricanes and flooding
  • Justifying pricing decisions and underwriting assumptions as a response to climatic events
  • Preventing further imposition of disclosure mandates in the future

 Many insurance companies already have measures in place to share with oversight agencies how they are shoring up their policies and financial stability. But, it may not be enough. Some regulatory departments have suggested requiring stress testing using a broad range of climate-related scenarios. This would also include providing how companies are using climate data as part of their risk model when determining pricing or making decisions in regard to underwriting.

All these suggestions could be asked on top of the steps already being taken to prevent losses related to volatile weather events.

Steps Insurers Can Take Right Now to Combat Climate Change Risk

While this article may sound like a bunch of doom and gloom for insurers already overburdened with countless regulatory demands, there are several actionable steps you can take right now to do your part to protect your insurance company.

The NAIC's survey findings included interviews with a long list of industry experts with experience in rating and managing environmental risks to insurers. There were several areas where insurance carriers could immediately take steps to mitigate climate-based risk and ensure they become more resilient when faced with significant losses:

  • Manage climatic dangers to your company by taking an organizational-wide approach to them
  • Make climate risk a high profile risk focus within your entire company
  • Partner with agencies that specialize in public policies that encourage climate resilience
  • Implement advanced analytical tools and processes to improve your climate risk assessment practices
  • Collaborate with lawmakers, policymakers, and consumers to further mitigate your climate-related risks

Help Your Insurance Company Change with the Climate

Finding a way to maintain your financial stability and revenue streams with extreme weather events occurring more frequently is difficult. You need to find a balance that also ensures your consumers have access to your products and can afford to buy them.

Consider the following to help your insurance business adapt in a world experiencing unprecedented climate risks:

  • Mitigate exposure by fortification of your climate risks and implement long-term action plans to alleviate future vulnerability.
  • Be holistic in your approach to climate change dangers by prioritizing such hazards in your management efforts.
  • Prove to your oversight committees, consumers, and regulators that you have taken additional steps to be climate-ready.

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