Hurricane Sandy Demonstrates That the Insurance Industry Should Be Wary of Climate Change

It’s Tuesday morning and I’m sitting in my Brooklyn apartment looking outside. On my street, the damage from Hurricane Sandy seems to be minimal, but unfortunately in other parts of the city and many other areas in the East Coast the situation is different.

In terms of economic toll, the damages caused by the hurricane might range, according to experts, from $10 billion to $20 billion, which means there’s one sector who probably hates Sandy more than anyone else – the insurance industry.

For insurance companies, Sandy is a real bummer – according to Ceres, 2012 has been a much better year so far for property and casualty insurers than 2011, with a steep decline in the insured catastrophe losses (the government apparently is the one paying for the huge drought damages). Yet, insurance companies didn’t really need to wait for Sandy to see a clear trend of more frequent and severe extreme weather events.

For those in the insurance industry who still didn’t fully grasp it, Ceres’ new report provides a very clear message: This accelerating trend “could undermine some insurers’ ability to manage and, in some cases, even survive, future catastrophic, weather-related loss events.” Stormy Future for U.S. Property/Casualty Insurers: The Growing Costs and Risks of Extreme Weather Events connects the dots between climate change, extreme weather events, financial risks and economic losses. Like a skilled prosecutor during a trial, Ceres presents the evidence, building a very convincing case that no reasonable jury can reject.

The first exhibit is the growing insured losses due to extreme weather events. “The value of insured losses due to weather perils has been trending upward over the past 30 years, with 2011 exacting an especially heavy toll. Overall, the estimated $44 billion of insured catastrophe and extreme weather losses in 2011 was second only to 2005 when Hurricanes Katrina, Rita and Wilma hit the Gulf Coast (with insured losses totaling approximately $60 billion).”

The second piece of evidence is the connection between climate change and the weather events. The report explains that “the worldwide impacts of climate change are already discernible. Global average as well as land and ocean temperatures have increased.” Further evidence for this connection can be found in a growing number of reports, including a special IPCC report on extreme events, which notes that “a changing climate leads to changes in the frequency, intensity, spatial extent, duration, and timing of extreme weather and climate events, and can result in unprecedented extreme weather and climate events.”

In fairness, it should be noted that when it comes to hurricanes, including Sandy, climate change is just part of the story, not all of it. “It will always be a combination of both climate change and natural variability,” Todd Sanford, climate scientist with the Union of Concerned Scientists told the Boston Globe. Nevertheless, as Elizabeth Colbert rightly wrote in the New Yorker earlier this week, “As with any particular ‘weather-related loss event,’ it’s impossible to attribute Sandy to climate change. However, it is possible to say that the storm fits the general pattern in North America, and indeed around the world, toward more extreme weather, a pattern that, increasingly, can be attributed to climate change.”

The third link in the chain is the impact of the growing insured losses on the performance of the insurance companies. According to Ceres report, the overall profitability of the property/casualty insurance sector significantly lags behind other industries, and the return on equity (ROE) for all Fortune 500 companies has substantially exceeded the property/casualty sector ROE in every year since 1994. These poor results cannot be solely attributed to extreme weather losses, but nevertheless these losses play an important role in the increased vulnerability of the sector.

So let’s say insurance companies got it – climate change causes more extreme weather events which in return cost the companies a lot of money – what should they do about it? The report includes some useful recommendations for insurance companies, investors/rating agencies and regulators.

Ceres recommends that insurance companies look at their risk exposure and evaluate losses to insured property based on new and emerging weather patterns, not on past experience, and conduct and support further research on future weather and catastrophe patterns, update insurance rates to adequately reflect damages from higher frequency and severity of extreme weather events and promote the reduction of carbon emissions (in house and among customers).

While these recommendations, mostly relating to climate risk management, are all very important, one recommendation that is missing is to ensure that climate change will be part of the public and political discourse. Insurance companies have a direct interest in making climate change a top priority of policy makers as well as to increase the awareness of the public to its direct economic consequences – after all, climate change doesn’t just put the companies under pressure but also insurance affordability and availability, which are two important elements in every market.

Will insurance companies be the canary in the climate change mine? I hope so, but the question is probably more when rather than if – my guestimation is that with every hurricane this day is getting closer.

[Image credit: doxella, Flickr Creative Commons]

Raz Godelnik is the co-founder of Eco-Libris and an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and the New School, teaching courses in green business, sustainable design and new product development. You can follow Raz on Twitter.

Raz Godelnik

Raz Godelnik is an Assistant Professor of Strategic Design and Management at Parsons The New School for Design. His research interests include the convergence of innovation, sustainability, business and design strategies, as welll as the sharing economy, open innovation and sustainable business models. Currently he is involved in projects focusing on the impact of the sharing economy on traditional business, the relationship between sharing economy and resilience, design intelligence, and whether Millennials can integrate sustainability into their lifestyle.Raz is the co-founder of two green startups (Hemper Jeans and Eco-Libris) and a contributor writer to Triple Pundit.