Insurance industry’s climate change dithering could be catastrophic for global economy

Some numbers to keep insurance executives reaching for the Ambien in the dead of the night: Extreme weather driven by climate change cost the US insurance industry $32 billion in 2011. Superstorm Sandy alone led to some $25 billion in insured losses last year, the warmest on record. And today climate scientists released a study showing global temperatures have hit a 4,000-year high.

So one might think the insurance industry would be leading the charge on climate change, given its multitrillion-dollar exposure to property damage resulting from the hurricanes, droughts, wildfires, and other weather-related calamities that are increasing in frequency and intensity as the planet warms.

Not exactly.

Ceres, the Boston-based nonprofit that promotes corporate sustainability, released a report yesterday analyzing 184 insurers’ responses to an annual climate risk survey mandated by the states of California, New York, and Washington for any insurance company conducting more than $300 million in business.

“In general, almost all companies responding to the survey show significant weakness in their preparedness to address the effects climate change may have on their business,” the report states.

As Ceres notes, the global economy would be paralyzed without insurance lubricating commerce. And since the insurance industry is also a major institutional investor—to the tune of $5 trillion—bad bets on companies exposed to climate change risk could erode insurers own balance sheets and their ability to cope with multiple Sandy’s in the years to come. Not to mention liability from litigation arising from customers such as power plant operators whose emissions contribute to climate change.

“A substantial proportion of the revenue generated by insurers is derived from investment returns,” the Ceres report notes. “Just as climate change may substantially increase insured losses, it may also adversely affect the investment performance that insurers rely on to meet their liabilities.”

The study found that only 23 of the 184 insurers have adopted comprehensive climate change strategies as part of their risk management operations. Of those 23 more forward-looking companies, 13 are foreign-owned.

Ceres rated insurance companies’ climate change policies on a 50-point scale. The average score was a rather dismal 7.5 with 17 companies scoring 0 and one insurer taking the highest score of 33. (Ceres withheld the identities of individual companies in the rankings.)

So while Swiss Re collaborates with the United Nation’s Intergovernmental Panel on Climate Change, some US insurers appear reluctant to categorically acknowledge the existence of global warming.

“Allstate is not endorsing, rejecting or expressing any opinion with respect to any particular scientific pronouncement about climate change/global warming,” the US insurance giant cautioned in its response to the survey.

Most insurers have implemented sophisticated strategies to evaluate the risks associated with extreme weather and climate variability, according to CERES. But few are looking at climate change as an immediate threat whose impacts are accelerating with each passing year.

Property insurers, not surprisingly, are at the forefront of industry efforts on climate change. Some life insurance companies, on the other hand, see little connection between climate change and the potential consequences for their business.

“We do not believe climate change poses a risk to our company,” was the response of Bermuda-based Athene Annuity & Life Assurance.

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