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Risk managers, insurers should heed report’s climate change warnings: experts

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A climate report released by the federal government featured dire warnings about the impact climate change will have on different regions and industry sectors in the United States and the economic losses that will materialize if climate warming continues largely unchecked – warnings that risk managers and insurers should heed and react to given that such warming could raise major insurability and liability questions, experts say.

The Paris climate agreement outlined a 2-degree upper limit on global warming above pre-industrial levels, with a preferred target limit of 1.5 degrees set out by the United Nations International Panel on Climate Change. But without more significant global greenhouse gas mitigation and regional adaptation efforts, climate change is expected to cause substantial losses to infrastructure and property and impede the rate of economic growth in the United States over this century, according to the Fourth National Climate Assessment released on Nov. 23 by the U.S. Global Change Research Program.

“It’s all pretty grim,” said Nigel Brook, a London-based partner with law firm Clyde & Co LLP. “Even on the most optimistic pathway where we really make huge efforts to control carbon emissions, we’re still looking at a changed climate.”

The national climate assessment is “a kick in the pants,” said Mark Humphreys, vice president of litigation and risk management for real estate developer Watt Cos. in Santa Monica, California, and vice chair of the Risk & Insurance Management Society Inc.’s external affairs committee. “It tells us we as an industry, as a community of risk professionals, we need to start looking at those areas that have fallen behind and push wherever we can, whether it’s government, whether it’s private enterprise, to deal with those issues.”

Regional economies and industries that depend on natural resources and favorable climate conditions such as agriculture, tourism and fisheries are increasingly vulnerable to impacts driven by climate change, according to the report. “The potential for losses in some sectors could reach hundreds of billions of dollars per year by the end of this century,” the report stated, pegging annual economic losses across all the analyzed sectors at more than $500 billion.

Coastal property damage could reach $118 billion per year in economic losses by 2090, according to the report.

“Insurance companies, right here and now, they need to – if they haven’t yet – take this seriously and understand what are the impacts of climate change, how are they steadily worsening and escalating and what does that mean to their business models,” said Cynthia McHale, senior director of insurance for Boston-based investor coalition and sustainability advocacy group Ceres. “I think the National Climate Assessment report is a great starting point for all insurance companies to start to think about their exposures to this broad range of climate-related risks.”

Natural catastrophes are going to continue to worsen and intensify, becoming increasingly costly from an economic and insured loss perspective, as seen this year and last year with the California wildfires and the 2018 hurricanes, experts say.

“From an insurability standpoint, it’s so much more widespread that the financial dollars are kind of staggering,” said Mike Vitulli, director of risk management services for Risk Strategies in Boston. “There’s an $8 billion storm twice a quarter now.”

The national climate assessment “provides us with some new ammunition” to press Congress for a solution for the National Flood Insurance Program, which received a 7-day reprieve on Nov. 30, Mr. Humphreys said.

He said he was “struck by” the assessment’s highlighting of the nuts and bolts impacts of rising temperatures and dry forests and the resulting increase in wildfire risks, which he said was particularly relevant in the context of the recent deadly California wildfires and the destruction in the town of Paradise and served as a reminder to insureds and their brokers to examine policies “to make sure you’re properly insured.”

“The risk is increasing and it really needs to be dealt with,” Mr. Humphreys said.

Liability questions

A new report released by Clyde & Co on Monday noted that there are a broad range of new types of liability exposures as well as novel litigation tactics being deployed by activists to force change and by cities and others to recover the costs of climate-related damage and resilience measures. To date, many of these proceedings have failed to overcome substantial legal hurdles, but that could be about to change, the report stated.

The National Climate Assessment and other reports are “fleshing out the foreseeable loss” and providing information that will likely underpin future litigation, Mr. Brook said. “You still have to prove causation … but this is a vital part of that picture: that if you put that carbon dioxide out there, this is one of the consequences.”

The insurance industry is also facing climate-related risks on both the underwriting side and the asset side of their businesses, experts say.

“For sure, we will run into 2 degrees if we don’t up our game,” said Thomas Liesch, climate integration manager for Allianz SE based in Munich. “Insurers can provide risk mitigation and risk transfer solutions for that, which is a very good role to play. We can also start shifting the trillions, meaning shifting our investment assets into sectors and companies which contribute positively to decarbonization.”

“I think what (the National Climate Assessment is) going to do is force insureds to think hard about doing pre-loss mitigation,” said Brian Dove, USI Insurance Services LLC’s national real estate practice leader in Dallas. “These events are occurring. We can’t stop them.”

“Insurance companies are going to have to impose that on their clients because reinsurers can only do so much and the reinsurers are getting hit really hard from all these losses,” he added.

But the soft market may limit insurers’ ability to force policyholders to engage in risk mitigation techniques, with insurers unable to raise pricing although there has been pressure on deductibles, Mr. Dove said.

“The challenge is, in this current market, the ability to impact pricing and deductibles is hard because there is so much capacity available,” he said.

Risk managers should not be surprised if insurers stop writing certain aspects of weather disasters or certain regions of the country, Mr. Vitulli said.

“What usually happens with insurers is when they start to have claims they start to find ways to not cover them going forward, like they did with flood, like they did with terrorism,” he said.

But “there will always be an insurance solution,” Mr. Humphreys said. “Will it be affordable? That’s the question, but there will always be an insurance solution if you need to find one because we’re a very resourceful group of people.”