The devastating impact of October’s Hurricane Sandy is hard to comprehend. One figure, though, speaks loud and clear: the super storm’s $50 billion price tag, a figure outmatched only by the more concentrated power and levee failure of Hurricane Katrina.
It was Al Gore who first introduced the idea of global warming as an inconvenient truth. However for the insurance industry, the warming of our planet is more of an incontrovertible truth—they simply cannot afford to operate under business as usual with events like Sandy depleting their bottom line with an increasing regularity.
While it may have taken a storm of unprecedented magnitude for climate change to even enter the 2012 election rhetoric, federal and state governments, as well as large reinsurers, will be paying out of pocket for Sandy whether they like it or not, as primary insurance companies aren’t able to foot the massive bill on their own.
Because of the increasing frequency of events like Sandy, it’s hard to dispute that it is in all insurance providers’ best interests for the government to comprehensively address climate change and reverse the warming of the planet. Proof of that is provided by the insurance provider Allianz, who reported that 40 percent of its claims stem from natural catastrophes. However, depending on which side of the Atlantic you’re on, the industry response has been drastically different.
In Europe, the insurance industry has appeared to ‘get’ climate change for some time now. In 2007, a consortium of leading international insurance companies (which include some Canadian companies, though none from the U.S.) founded Climate Wise, an initiative to inform public policy making, increase climate awareness, and assess climactic risks more accurately. In a speech given that same year, the chairman of Lloyds of London named climate change as the most pressing issue facing their company.
In the U.K., the Association of British Insurers has taken the step of placing the onus on the government by threatening to withhold affordable coverage if they do not improve its land management practices to a more resilient strategy.
Meanwhile, as the U.S. government dithers in a state of myopia and the media underreports the issue altogether, the insurance industry seems similarly reluctant to lobby government or to undertake a more comprehensive risk assessment, despite a clear motive for doing so. A 2011 report done by Ceres—a coalition of investors and businesses working to address climate change—surveyed 88 insurance providers in six U.S. states and found that only 11 had comprehensive climate change policies.
Cynthia McHale, director of the insurance program for Ceres, says the reason for this reluctance in the U.S. is two-fold.
“Climate change [in the U.S.] is so politicized,” McHale said. “And the insurers don’t want to be on a side [of public opinion] that might be unpopular.”
The second, more complicated reason is the fact that the same insurers who are losing money to extreme weather events also provided coverage for many of the major greenhouse gas emitters themselves, such as oil and gas players, and utility providers.
“This is a mega exposure—way bigger than what the tobacco industry went through,” McHale said. “We’ve heard from many insurers that their [legal] counsel has advised them not to use any language that implicates greenhouse gas emissions as causing climate change [because] there’s an enormous fear of what may be coming down the road in terms of climate liability.”
Regardless of whether they draft a formal response or not, insurance companies are being forced to respond to the changes brought by climate change in some way. According to a report from the U.S. Department of Energy’s Lawrence Berkeley National Laboratory, Allstate insurance has taken up a policy of denying or refusing to renew property insurance in low-lying coastal areas of the Gulf states. After losing virtually all profits in the region, the company wants to cut the 1.2 million homes it once insured in Florida down to 100,000.
McHale said that historically, this withdrawal from a region is a standard, if shortsighted, industry response, but it isn’t a sign of the insurance companies addressing global warming in a meaningful way.
“Saying ‘We’re not going to write policies here' or 'we’re going to exclude coverages or increase deductibles’—those are more sort of tactical measures to reduce their exposure,” McHale said. “But it’s not a winning strategy right because you’re just writing less and less business.”
Many scientists say the window that global governments have to act before a climactic ‘tipping point’ brings about a new, disturbing normality is imminent. That could mean that when the political will to pass meaningful climate legislation is finally present, it will have to be heavily focused on mitigation strategies, risk reduction, and resiliency building, rather than on actually reversing the warming of our planet.
However, with events like Sandy occurring more regularly and with the increasingly deleterious impact that they have on insurance providers’ bottom lines, it will presumably become harder and harder for lawmakers to avoid climate change while still saving face.
“The industry is not lobbying and they’ve been reluctant to be part of the policy making process,” McHale said “But with Sandy and the series of extreme weather events, I do think we’re beginning to see a real change in the property/casualty insurance industry’s willingness to engage on this and discuss resiliency.”
And, as major campaign donors—the 2010 election cycle saw $157 million in donations from insurance lobbyists, which is more than the $147 million that the oil and gas lobby contributed—one could argue that insurance companies certainly have the financial clout to push the government into more decisive action.
“[The insurance industry’s] hands are not tied,” McHale said. “They could step up today to speak publicly about the risks of climate change and they could lead in risk analysis. Their willingness to take action on climate change will benefit them and their businesses as well as society. I’d rather we didn’t have to wait for the political will [to materialize].