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Insurance Companies Calculate the Cost of Climate Change

Jan Lee headshotWords by Jan Lee
Energy & Environment
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Homeowners may be facing new insurance requirements in the coming years, thanks to climate change.

In Canada, where some provincial governments require flood zones to be clearly identified for insurance purposes, prospective homeowners must now consider whether they will need "overland flood insurance" to offset the cost of inundated streets or property that is not in a designated flood zone.

Overland flooding is water that accumulates above ground and seeps through openings like windows, doors and other openings. It is the latest designation for flooding that may come from climate impacts, where the weather conditions leads to too much water on the property.

Last year's catastrophic flooding of Houston, Texas is an example of chronic overland flooding made worse by climate impacts, in this case a tropical storm.

Canada and the U.S. aren't the only countries to be faced with the implications of this type of flooding. But the increase in destructive storms in recent years has prompted insurance experts in both nations to call for homeowners to beef up their insurance coverage.

And this has led to British Columbia, Canada's most-western province, to claim a new caveat to disaster assistance: homeowners who live in areas that are eligible for overland flooding insurance and are uninsured may not be eligible for disaster assistance, either.

The reason, say experts, is that disaster assistance in Canada is meant to support those who were powerless to prevent the damage. Homeowners in areas where the rider is sold are required to have the new coverage.

"[Insurance] companies do not offer flood insurance in high-risk locations because the premiums would be prohibitively expensive," explains the province's emergency management agency (EMBC). It isn't clear what geographic areas of British Columbia would be exempt from having overland flood insurance.

Homeowners aren't the only ones wrestling with the prospect of increased risk from climate change. According to research conducted by Insurance Business Magazine last year, the cost of payouts for climate-related damages is putting a strain on many small insurance agencies.

In the U.S., climate change is being blamed for the number of repeat payouts due to flooding. According to the National Flood Insurance Program, the number of properties that have reported second-loss claims has increased by more than 60 percent.

In fact, as Robert Muir-Wood, chief scientist for Risk Management Solutions (RMS) explained in a recent interview with Smithsonian Magazine, analysts no longer find it feasible to forecast weather patterns based on the past 100 year-average. RMS provides data software for insurance companies and is often credited with companies' ability to calculate adverse weather risk.

"Our business depends on us being neutral," Muir-Wood told Smithsonian in 2013, a year that saw catastrophic flooding in many areas of the U.S. and Canada.

“In the past, when making these assessments, we looked to history. But in fact, we’ve now realized that that’s no longer a safe assumption—we can see, with certain phenomena in certain parts of the world, that the activity today is not simply the average of history.”

In fact, when it comes to sizing up the potential for Atlantic hurricanes, which cost the insurance industry more than $150 billion in 2017, RMS says it has thrown out the rule book and "no longer uses its historical 100 year old database of Atlantic hurricanes as a valid predictor of future risk.” Instead, the new model predicts a “heightened hurricane activity and correspondingly modeled loss.”

But hurricanes aren't the only risk factor that has an impact on how we live and insure our homes and businesses.

A study reported by Nature Climate Change found that this decade, the global economic price tag for heat island effect could be almost triple what was originally anticipated.

According to the Environmental Management and Policy Research Institute, that rise in atmospheric heat can present risks for regional fires. There is not enough data yet, however, to suggest whether insurance rates will be affected.

But like rising sea levels, those risks are likely to be reflected in new city building codes and environmental policies in the near future. The county of Santa Cruz, long known for its summer beaches and occasional stormy winter weather, is already considering the changes that may be needed to future building codes as California's Monterey Bay area faces more adverse storms, hotter summers and more scrutiny from insurance carriers over the risks that are carried by climate change.

Image credit: DVIDSHUB/Flickr

Jan Lee headshotJan Lee

Jan Lee is a former news editor and award-winning editorial writer whose non-fiction and fiction have been published in the U.S., Canada, Mexico, the U.K. and Australia. Her articles and posts can be found on TriplePundit, JustMeans, and her blog, The Multicultural Jew, as well as other publications. She currently splits her residence between the city of Vancouver, British Columbia and the rural farmlands of Idaho.

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