Insurance is the primary economic tool to recover from weather-driven losses caused by windstorms, hailstorms and drought-driven wildfires. Much scientific research supports the theory that climate change may increase the prevalence and severity of these losses in the future.
That’s why the Washington State Office of the Insurance Commissioner (OIC) conducted a survey in June 2008 to see what insurers are doing to address the potential risk climate change poses to insured losses. This was the first time an insurance regulator conducted such a survey.
The report (below) is broken into three sections:
We sent a “blind survey” to the top 40 insurance companies that offer homeowners policies in Washington state, and the top 40 insurers that offer commercial policies, to find out how they are dealing with climate change.
The questions covered a variety of subjects, from how the insurers account for climate change in their underwriting, investments and operations, to which climate-related perils concern them most in Washington.
About half of each group responded:
- 21 home insurers, representing about 60 percent of the policies in that market.
- 19 commercial insurers, representing about 54 percent of the policies in that market.
Rates and underwriting
At this point, neither commercial nor homeowner rates have increased as a result of climate change. Both groups of insurers indicated that climate change will increase rates if the frequency and severity of weather-related losses increases. Increased rates would require changes in modeling and forecasting of loss costs, continuous review of risk-based pricing, and potentially higher deductibles and pricing disparities based on the type of building materials.
Underwriting (the process by which an insurer decides what risks it will insure) also has not been affected by climate change, but may be in the future.
When asked how climate change might affect future underwriting practices, commercial insurers largely focused on monitoring and updating guidelines, diversifying product offerings and the geographic location of risks. More than two thirds of homeowner insurers said climate change may change coverage needs or that it could result in restricted coverage.
Perils that concern insurers
It is clear that both commercial and homeowner insurers are concerned about the impact climate change may have on wildfires, flooding, and windstorms. Specific concerns include:
- Drought conditions in Central and Eastern Washington have affected forest health, and could result in losses to homes in forested areas.
- While floods are generally not covered by commercial and homeowner insurance policies, it can be a source of litigation for insurance companies. (Flood coverage is only available through the federal National Flood Insurance Program.)
- In a wind and flooding event, it can be difficult to determine if wind or water caused the damage to the property. If more frequent or severe flooding events are caused by climate change, these disputes could become more frequent.
- More frequent or severe windstorms, such as the December 2006 Hanukkah Eve windstorm that caused $220 million in insured damages.
Climate-friendly product offerings
While climate change may present challenges for insurers, it also presents opportunities. The large majority of both insurers surveyed are considering or already offering products that encourage customers to reduce their greenhouse gas (GHG) emission, including:
- Mileage-based auto insurance.
- Discounts for hybrid or fuel-efficient vehicles.
- Property insurance policies that will rebuild structures that are using low-GHG building materials and employing energy-efficient techniques.
- Insurance coverage for “carbon-trading” mechanisms that reduce emissions in our economy, such as the Western Climate Initiative.
Climate-friendly insurance products give consumers product options to reduce their carbon footprint, while allowing insurers to earn a reasonable profit.
Insurer mitigation activities
The insurers surveyed also are focused on lowering their own GHG emissions. Some of their strategic mitigation activities include:
- Reducing fleet size or purchasing hybrid and flex-fuel vehicles.
- Reducing “emissions per policy” by 35 percent.
- “Paperless” technologies in claim handling.
- Improving energy efficiency of facilities and building new facilities that are LEED certified (www.usgbc.org).
- Participating in the Business Roundtable Climate RESOLVE initiative (www.businessroundtable.org).
- Participating in the Carbon Disclosure Project (www.cdproject.net).
These efforts are very encouraging. They have environmental benefits and may ultimately help reduce insured losses, keeping insurance affordable for all consumers.
We have taken an active lead in raising awareness about climate change and its effects on the insurance industry. This survey will help the office better understand how insurers view climate change and the challenges it presents to those companies and insurance consumers. It also captured the great progress in insurer awareness and climate-change-related activities over the last two years.