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Insurers urged to focus on climate change risks, not politics

Posted On: Aug. 9, 2017 1:16 PM CST

BURLINGTON, Vt. — Insurers should focus on the real risks climate change presents to their business operations and less on the political debate surrounding the issue, according to experts.

“Many international insurance and reinsurance organizations have been very vocal about emerging risks such as climate change and the need of insurance markets to respond,” Richard Smith, president of the Vermont Captive Insurance Association, said at the organization’s annual conference in Burlington on Wednesday.

But Mr. Smith said it is still somewhat surprising to him that most insurers are not adequately prepared for perils such as cyber breaches, climate change and political risk.

“Drastic fluctuations in the weather are a reminder that climate change is upon us whether you believe it is a natural occurrence, caused by humans or a little bit of both,” he said. “Our industry should be focused less on the political debate and more on how we respond to it and mitigate it. My hope is that the captive insurance industry will take the lead in this area.”

“Frankly, what I’m personally most concerned about in our country, and this is not true in Europe ... is the failure by our government at the highest levels to take this seriously,” said James Brache, Denver-based deputy managing director for credit and political risk at Zurich North America. “That’s a personal opinion, but if we don’t take it seriously and do something about it, we’re going to miss that window of opportunity.”

“China is actually stepping into that breach, to be a leader on climate change,” he continued. “They have a lot to lose. Guangzhou and a lot of other Chinese cities are at risk. They recognize that it’s a risk, and they know they’re a major contributor to emissions. But the U.S. unfortunately is not very clear on its leadership at the moment.”

In addition to direct physical risk to property, including sea levels that are projected to rise 11 to 38 inches by the end of the century and pose a significant risk to coastal cities, climate change poses indirect risks to corporate supply chains, Mr. Brache said.

Climate change also is relevant to the insurance industry for reasons beyond the physical threats posed by climate change, including the likelihood of decreasing investment returns for insurers invested in fossil fuel companies, he said.

“Insurers as investors have to think about where they’re going to invest their money,” Mr. Brache said. “Are the companies in which they are investing their money planning for the future and how the world will be changing?”

Insurers are also facing greater regulatory and investor scrutiny into whether they are adequately prepared to deal with climate change risks, possibly facing an increasing number of directors and officers’ liability claims.

“Investors are going to be looking at: is that insurance company too concentrated on the Florida coast,” Mr. Brache said. “Are they too concentrated in areas subject to hurricanes, flooding or drought if you insure crops.”

A 2016 global analysis that ranked cities for exposure of vulnerable assets to coastal flooding in 2070 pegged Miami as standing the most to lose in financial assets of any coastal city at an estimated $3.5 trillion, followed by China’s Guangzhou with $3.4 trillion and New York with $2.1 trillion.

“Rising sea levels and rapid development equals frequent flooding,” Mr. Brache continued. “The combination of sea levels rising and rapid coastal development, particular in Florida, translates to more flooding and more damage to physical assets.”

A 2016 analysis by 29 major insurers, including Zurich, found that the difference between the costs of natural disasters and the amount insured has quadrupled to $100 billion a year since the 1980s.

“These skyrocketing costs can make some assets uninsurable,” he said.

But climate change does present some opportunities for action, including governments and corporations building on the pledges in the Paris climate agreement to limit the rise in global temperatures and continue to move toward clean technologies, he said. In addition, investing in mangroves can help shield against future erosion caused by rising sea levels, as well as investments in new roads and sea walls, Mr. Brache said.

Insurers and other businesses can follow the ADAPT matrix for building resilience: analyze the issues, develop an internal strategy, assess risks and opportunities, prioritize actions and take actions, he said.

“We are in a position where we need to take action soon,” he said. “We have our backs against the wall a bit, but I think if we all take action, we can salvage this. But we can’t wait for too long. If we wait for too long, we hit a tipping point.”