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The majority of insurers, particularly in the United States, do not integrate climate change into their risk management practices despite historic flooding in many communities, but reinsurers have had a better response to climate change-related financial risk, according to a study released Tuesday.
Most insurance companies assumed the risk to property from extreme weather is static and based their premiums on historical data, according to a study of data from 178 insurers conducted by the University of Waterloo in Ontario, Canada. Insurers have not adjusted as extreme weather events have increased in severity, frequency and unpredictability, according to the study, Insurance and Climate Change Risk Management: Rescaling to Look Beyond the Horizon.
“As extreme events become more frequent, insurers that ignore climate change will not put away enough money to cover their claims,” Jason Thistlethwaite, a climate change economist at the University of Waterloo, said in a statement on Tuesday. “To recoup those losses, they’ll have to raise rates or pull coverage from high-risk areas. When this shift happens, thousands of people will lose coverage or it will be unaffordable.”
However, reinsurers have been better at reacting and adapting to climate change-related financial risk — a dynamic that could lead to significant disruption in the global insurance industry, according to the study.
“The U.S. property insurance industry has yet to integrate practices to manage climate change risk comprehensively,” the report stated.
“Some insurers are better at understanding climate change than others,” Mr. Thistlethwaite said. “These organizations will survive and likely be able to sell climate services to their counterparts struggling to understand the problem. Those that don’t will fail.”
The researchers analyzed data from the National Association of Insurance Commissioners’ 2012 and 2015 climate risk disclosure surveys.
Insurers and reinsurers are facing escalating pressure to boost their sustainability efforts, including improving their disclosure of climate risks and divesting their investments in fossil fuels.