Huge costs seen in climate inactionPosted On: Jan. 3, 2019 12:00 AM CST
Risk managers and insurers should work to mitigate climate exposures, particularly if action by companies and governments fails to stop the potential dire economic consequences of climate change described in a recent report issued by the federal government, experts say.
Catastrophes such as the deadly California wildfires in 2017 and 2018 will continue to occur and become more expensive for the U.S. economy, raising questions about the insurability of property and other assets in exposed regions.
The 2015 Paris climate agreement outlined a 2-degree Celsius upper limit on global warming above preindustrial 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.
The key lesson for risk managers from the assessment is “that climate change is happening, regardless of how you feel about the political end of it,” 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. “But it is our job as risk managers to make sure our stakeholders are aware of the areas where climate change affects our respective businesses.”
Labor could be significantly affected by climate change — due to. for example, an increased likelihood of heat exhaustion or respiratory conditions — with annual economic losses projected to reach $155 billion by 2090, while extreme temperature mortality could cost $141 billion per year by 2090, according to the assessment.
“That starts to bring to mind losses related to workers compensation — people working in very hot conditions that are ultimately dangerous to human health,” said Cynthia McHale, senior director of insurance for Boston-based investor coalition and sustainability advocacy group Ceres.
Natural catastrophes will continue to worsen and intensify as seen this year and last year with the California wildfires and the 2017 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 RSC Insurance Brokerage Inc., which does business as Risk Strategies in Boston.
“The property markets have been aware of this for a long time, and the concern about fires has been a big deal,” Mr. Humphreys said. “I don’t know how much the carriers have yet tied it to climate change. This report will go a long way, and I think we’re going to be seeing a lot more of it in the coming year or two.”
The changing climate has serious implications for supply chains, with the assessment highlighting the effect of the 2011 floods in Thailand, which created a shortage of computer hard drives and led to $199 million in losses for San Jose, California-based Western Digital Corp., noted Joel B. Smith, principal for research and consulting firm Abt Associates Inc. based in Boulder, Colorado, and chapter lead for the assessment’s climate effects on U.S. international interests section.
“There are a lot of significant challenges for business and particularly for insurance,” he said. “Take it seriously.”
“For sure, we will run into 2 degrees if we don’t up our game,” said Thomas Liesch, climate integration manager for Allianz SE 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 (of dollars), meaning shifting our investment assets into sectors and companies which contribute positively to decarbonization.”
Insurers can help risk managers mitigate climate risks in many ways, including by using risk mapping and modeling tools in risk assessment, said Nigel Brook, a London-based partner with Clyde & Co LLP.
“I think what (the assessment is) going to do is force insureds to think hard about doing preloss 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, Mr. Dove said.
Insurers could insert exclusions in policies for certain aspects of weather disasters or for certain regions of the country, Mr. Vitulli said.
There will always be an insurance solution, but the question is: “Will it be affordable?” Mr. Humphreys said.