Most insurers are unprepared for climate risks, but a few develop strategies -- study

U.S insurance companies are generally unprepared for risks related to climate change, with some denying that climbing temperatures could affect their business and others neglecting to account for likely carbon regulations, according to a new analysis.

The industry isn't firmly grasping how the physical threats of climate change, like intensifying drought and storms, are merging with political and financial impacts to alter the companies' ability to find future investment returns and shape insurance policies, says the report, being released today by Ceres, a group of institutional investors that is pushing the industry to support climate solutions.

Some companies also confuse the up-and-down swings of short-term climate variability with potentially unseen risks related to atmospheric alterations by greenhouse gases, it says. Preparing for a change over a decade or two isn't the same as bracing for less predictable impacts further into the future, the authors suggest.

The assessment stems from a requirement initiated last year by three states forcing large insurers to answer regulatory questions about their efforts to prepare for climate change. Ceres scoured the responses from 184 companies and concluded that the industry earned an average score of 7.3 points out of 50.

"In general, almost all companies responding to the survey show significant weakness in their preparedness to address the effects climate change may have on their business," the report says. "However, a small subset of industry leaders are evolving their business strategies to remain competitive as the impacts of climate change unfold."


Just 23 companies have developed a comprehensive strategy to cope with rising temperatures, the analysis found. Of those, 13 are owned by foreign companies like Zurich Insurance Group, Allianz and Axa Group, underscoring what industry observers say is a gap between European insurers and their less-ready counterparts in the United States.

While many companies, especially smaller ones, are unclear about the future impacts of warming, some larger ones were cool to the notion that it's happening.

"Allstate and Travelers express strong ambivalence about the state of the science -- specifically, the existence of climate change and what is causing it," the report says.

Regulators could do more

Neither company provided a comment late yesterday. Both have in the past expressed concern at the rise in severe weather, perhaps underscoring the authors' distinction between variability and climate change.

Robert Hartwig, president of the Insurance Information Institute, an industry group, strongly disagrees with the report's findings. He says insurers have weathered catastrophic events like Superstorm Sandy and Hurricane Katrina and emerged surefooted financially.

"Ceres should step back and understand that most insurers are decades and some are centuries old," Hartwig said. "Many operate in countries around the world or in disparate geographic locations where the climate is very different from one location to the next. They have demonstrated over a span of centuries, in many cases, that they are adept to adjusting to variability and volatility in the climate in every corner of the planet."

Others believe that the survey responses required by insurance regulators in California, New York and Washington state reveal shortcomings that could carry consequences for the companies.

Regulators could expand their demands on insurers, reinsurers could limit their capital to better prepared companies, and agents and brokers might become more selective when steering climate-cautious clients to insurers, said Andrew Dlugolecki, an insurance expert in Scotland and a co-author of the Ceres report.

"The general level of performance on climate change at this point and time, I would say, is low," Dlugolecki said of U.S. companies.

Some signs of growing awareness

Regulators are partly to blame. Some companies, for example, say state regulators make it difficult to use innovative catastrophe models that predict more hurricane damage. Regulators also challenge insurers when seeking rate increases, affecting their ability to properly price risk. And the three-state survey doesn't ask the companies to think about ways to reduce emissions through the claims process, like specifying the use of low-carbon materials when rebuilding after a storm.

There are signs of improvement in the industry, which has investments valued at about $5 trillion.

Some companies are shedding high-risk property exposure in Florida. A few are carefully vetting investments in certain companies, while others back away from bonds in water-scarce municipalities that might fail to pay their debt.

"Companies with unsustainable practices, including those ignoring climate change impacts, typically make poor long-term investments," Employers Mutual Casualty Co. said in its survey response, the report says.

The report says few companies admit to adjusting their investment strategies to account for potential greenhouse gas regulations, even though the Obama administration is expected to develop carbon dioxide standards for existing power plants.

Still, Dlugolecki said some companies are beginning to shy away from the power sector, a traditional investment for U.S. insurers.

"They're carrying out very careful assessments now of the creditworthiness of those companies, which they would not have done in the past," he said. "They're paying a lot more attention to and they're favoring companies which have got a less carbon-intensive fuel mix."

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