Category Archives: Climate Change

Faster Decisions, Fewer Challenges Among Cyber Buyers

Good news for cyber insurers. A majority of companies continue to have network security and data privacy insurance, and are making their purchase decisions faster and experiencing fewer purchasing challenges than in 2015.

The findings come in the newly-released 2016 Network Security and Data Privacy Study by Wells Fargo Insurance.

While in 2015 the study showed that 22 percent of companies buying insurance took more than 12 months to make the purchase decision, in 2016 just 8 percent of companies are currently taking that long, while 59 percent are taking six months or less.

Cost of coverage and finding a policy that meets a company’s needs remain the top two insurance purchasing challenges of 2016. However, the study found that 19 percent of companies did not experience any purchasing challenges, a significant improvement over 2015 when only 6 percent did not experience challenges.

The easier purchasing process may be related to less internal resistance, Wells Fargo said. Likewise, in 2016, fewer companies (24 percent) believed the risk was not big enough to warrant the purchase of network security and data privacy insurance.


Of the companies in the study that had purchased insurance, one-fifth reported filing a network security and data privacy insurance claim in the last 12 months, and most were satisfied with their coverage.

Another key takeaway for cyber insurers? Protecting the business against financial loss was the primary reason for purchasing coverage (81 percent) in 2016, as in 2015. However, protecting the company’s reputation is an increasing concern, with 70 percent citing it in 2016, compared to just 58 percent in 2015.

Purchasing insurance is an important step, but it should be used in tandem with developing and testing a comprehensive incident response plan and performing a thorough cyber risk assessment, Wells Fargo noted.

The second annual study analyzed trends of network security and data privacy issues among 100 decision makers at companies with $100 million or more in annual revenue.

Check out Insurance Information Institute’s (I.I.I.’s) latest white paper on cyber risk threats and challenges here.

Billion-Dollar Insured Disaster Events Add Up

The first half of 2016 saw at least six individual billion-dollar insured disaster events globally, three of which occurred in the United States, according to Aon Benfield’s Global Catastrophe Recap: First Half of 2016.

Four of these events crossed the multi-billion dollar threshold ($2 billion and greater).

Screen Shot 2016-07-20 at 11.20.52 AM

As seen in the chart above the most costly event was a series of earthquakes that struck Japan’s Kumamoto prefecture in April with total insured losses—including losses due to physical damage and business interruption—expected to total in excess of $5 billion.

Other major loss events in the first half included:

—the late May and early June flooding and severe weather (Storm Elvira) in Europe ($3.4 billion insured losses);

—the Fort McMurray wildfire ($3.2 billion insured losses);

—the April 10-15 severe convective storm outbreak in the central United States ($3.2 billion insured losses).

Aon Benfield notes that all of the estimates from both public and private insurers are subject to revision as losses are further developed.

A deeper dive into the data reveals that there were at least 14 events that minimally cost insurers $500 million in the first half of 2016, eight of which were recorded in the U.S. and were all severe convective storm or flood-related.

Globally, public and private insurers endured an elevated level of disaster losses—$30 billion—during the first half of 2016, some 60 percent higher than the $19 billion sustained in 2015. The U.S. sustained the highest level of insurable losses at $14 billion.

The aggregated $30 billion was only the third time on record that first and second quarter losses reached that threshold—even after adjusting for inflation to today’s dollars, Aon Benfield said.

Check out Insurance Information Institute facts and statistics on global catastrophes here.

Industry Partnership Looks to Green, Risk-Informed Future

As we mark Earth Day and as nearly 170 countries gather in New York to sign the Paris climate treaty, a timely new partnership between the insurance industry, the United Nations and the World Bank is set to put vulnerable economies and societies on a path to a green, risk-informed and sustainable future.

The Insurance Development Forum (IDF) aims to incorporate insurance industry risk measurement know-how into existing governmental disaster risk reduction and resilience frameworks and to build out a more sustainable and resilient global insurance market in a world facing growing natural disaster and climate risk.

With more than 90 percent of the economic costs of natural disasters in the developing world uninsured (the so-called protection gap), the IDF mission is to better understand and utilize risk measurement tools to enable governments to use their resources to target resilience and better protect people and their property.

A press release notes:

“The IDF acts as a forum to enable the optimal coordination of insurance related activities; the development of shared priorities; the mobilization of collective resources; the development of strategic and operational relationships within and between governments, industry and international institutions; and, the avoidance of unhelpful and unnecessary fragmentation of efforts and resources. These collective actions can help close the protection gap.”

The IDF will be led by a high level steering group of senior leaders from the insurance industry as well as government institutions supported by an executive secretariat housed at the International Insurance Society (IIS).

IDF chair Stephen Catlin, who is also executive deputy chairman, XL Catlin and deputy chair of the IIS, commented:

“Insurers’ risk management skills help us assess natural disaster risk and can be exported to allow governments at all levels to reduce future losses by designing in resilience into infrastructure projects; and in increasing the use of insurance as a pre-disaster economic resource to allow people to protect their families, property and assets.”


“These skills can increase the utilization of insurance which will reduce the reliance on post-disaster aid and better target resources to the most important and needed humanitarian crises. Research has shown that a 1% increase in insurance penetration can reduce the disaster recovery burden on taxpayers by 22%.”

A keynote address by the UN Secretary General Ban Ki-Moon last week emphasized the critical role the insurance industry can play in building natural disaster resilience.

According to Swiss Re research, the global natural catastrophe property protection gap has risen steadily over the last 10 years, and 70% of the economic losses, or USD 1.3 trillion, were uninsured. In the emerging markets, 80 percent to 100 percent of the losses are uninsured.

Check out this Insurance Information Institute backgrounder on climate change and insurance issues here.

Warren Buffett On Climate Change Risk

Climate change made a few headlines over the weekend, both in best actor Leo DiCaprio’s Oscars acceptance speech and in Warren Buffett’s annual letter to Berkshire Hathaway shareholders.

Buffett, facing calls from a proxy voter to file a report on the risks that climate change might present to Berkshire Hathaway’s insurance business, said it seems highly likely that climate change poses a major problem for the planet, but made clear that climate change is not a concern for its insurance operation:

As a citizen, you may understandably find climate change keeping you up nights. As a homeowner in a low-lying area, you may wish to consider moving. But when you are thinking only as a shareholder of a major insurer, climate change should not be on your list of worries.”

Buffett said it was understandable that the sponsor of the proxy proposal believes Berkshire is especially threatened by climate change because “we are a huge insurer, covering all sorts of risks”.

Such worries might be valid, he said, if Berkshire wrote 10 or 20-year policies at fixed prices.

But because insurance policies are customarily written for one year and repriced annually to reflect changing exposures, Buffett maintains that climate change is an opportunity for growth. In his words:

Increased possibilities of loss translate promptly into increased premiums.”

According to Buffett, up to now, climate change has not produced more frequent or more costly hurricanes or other weather-related events. As a result, U.S. super-cat rates have fallen steadily in recent years, which is why Berkshire has backed away from that business.

If super-cats become costlier and more frequent, the likely — though far from certain — effect on Berkshire’s insurance business would be to make it larger and more profitable.”

For a broader perspective on how insurers are dealing with climate change risk, check out the Insurance Information Institute’s issues update paper: Climate Change and Insurance Issues.

Fight for Market Share Continues: MarketScout

Online insurance exchange MarketScout just reported that the composite rate for U.S. commercial property/casualty insurance declined by 4 percent in December 2015.

No line of business tracked by MarketScout saw a rate increase compared to the same month the previous year.

Its analysis was accompanied by some interesting commentary on the market by Richard Kerr, MarketScout CEO.

It may seem like the insurance industry has already been in a prolonged soft market cycle, but we are actually only four months in, Kerr noted.

The market certainly feels like it has been soft for much longer, because rates bumped along at flat or plus 1 to 1.5 percent from July 2014 to September 2015. The technical trigger of a soft market occurs when the composite rate drops below par for three consecutive months.”


MarketScout has been tracking the U.S. p/c market since July 2001 and Kerr also made the point that the length and veracity of the market cycles seems to have become less volatile in the last five or six years.

As a result, the impact of hard or soft market in today’s environment may be 5 or 6 percent up or down, he said.

Can you imagine how we would act today in a market such as that of July 2002 when the composite rate was up 32 percent? Or in December 2007 when the composite rate was down 16 percent?”

Kerr observed that underwriters today have better tools to price their products and forecast losses. Further, the chances of a rogue underwriter or company are greatly reduced by the industries’ checks and balances, Kerr said.

In his words:

There may be less excitement but there are probably far fewer CEO heart attacks.”

MarketScout’s historical barometer shows a mean average rate increase of 30 percent in calendar year 2002 and a mean average decrease of 13 percent in calendar year 2007.

The current environment is relatively benign in relation to these volatile years, MarketScout observed.

I.I.I. provides commentary on the p/c insurance industry financial results here.


More on Historic South Carolina Floods

The expected $2 billion minimum economic cost of the South Carolina and eastern U.S. floods in early October will place the event as one of the top 10 costliest non-tropical cyclone flood events in the country since 1980.

Aon Benfield’s latest Global Catastrophe Recap report, which evaluates the impact of natural disaster events occurring worldwide during October 2015, reveals that already public and private insurers have reported more than $400 million in payouts from the event.

Days of relentless record-setting rainfall caused by a complex atmospheric set-up brought tremendous flooding across much of South Carolina, leaving at least 19 dead, Aon reported.

The event caused considerable flood inundation damage to residential and commercial properties, vehicles, and infrastructure after more than two feet (610 millimeters) of rain fell from October 1 to 5.

Aon noted that the minimum $2 billion in total economic losses from the event includes infrastructure and $300 million in crop damage.

Preliminary reports from insurers suggest roughly $350 million in claims.

However, additional insured losses of at least $100 million are expected via the federal National Flood Insurance Program (NFIP) and the USDA RMA crop insurance program.

A recent  article  by Insurance Journal noted that the potential exposure home insurers in South Carolina face from the early October event is estimated at $18 billion. That’s according to figures by catastrophe modeling firm CoreLogic.

According to the Insurance Information Institute (I.I.I.), none of the 10 largest floods as ranked by NFIP payouts occurred in South Carolina (see below).

However, the state was affected by three of the most costly U.S. hurricanes: Hurricanes Charley and Frances in 2004 and Hurricane Hugo in 1989.

The list  includes events from 1978 to June 30, 2015, as of August 21, 2015.


Early Warning On Heat Health Risk

As many parts of the United States enter another day of high heat and humidity, we’re reading about the first ever heatwave warning guidelines issued by the United Nations earlier this month.

The guidelines are intended to alert the general public, health services and government agencies via the development of so-called heatwave early warning systems that should ultimately lead to actions that reduce the effects of hot weather extremes on health.

As the foreword to the publication states:

Heatwaves are a dangerous natural hazard, and one that requires increased attention. They lack the spectacular and sudden violence of other hazards, such as tropical cyclones or flash floods, but the consequences can be severe.”

In their joint guidance, the World Health Organization (WHO) and the World Meteorological Organization (WMO) note that heatwaves are becoming more frequent and more intense as a result of climate change.

According to the Intergovernmental Panel on Climate Change, the length, frequency and intensity of heatwaves will likely increase over most land areas during this century.

Recent world heatwave events come to mind:

Both India and Pakistan were hit by deadly heatwaves in the first half of 2015, leading to 3,600 fatalities, according to Munich Re. Temperatures were exceptional, climbing as high as 47 °C and accompanied by high humidity which compounded the effect.

European heatwaves in the summer of 2003 led to the deaths of tens of thousands of people, as did the Russian heatwaves, forest fires and associated air pollution in 2010. In fact, the Russian heatwave of 2010 still ranks among the top 10 deadliest world catastrophes 1970-2014.

The UN guidance makes the case that one way to manage the risk of heat-related health effects is through the development of a Heat Health Warning System (HHWS) as part of a broader Heat Health Action Plan (HHAP).

Of primary concern in an HHWS, it notes, is how to assess the level of heat stress associated with the meteorological or climate forecast, translate this into an estimate of a likely health outcome and identify a critical heat-stress threshold for a graded plan of action.

Typically, HHWSs are composed of a number of elements, including:

  • Weather forecasts of high temperatures that may also include humidity;
  • A method for assessing how future weather patterns may evolve in terms of a range of health outcomes;
  • The determination of heat-stress thresholds for action;
  • A system of graded alerts/actions for communication to the general population or specific target groups about an impending period of heat and its intensity and to government agencies about the possible severity of health impacts.

A number of cities and countries around the world have developed these early warning systems, including Canada, England, France, Germany, Italy, the United States and Australia.

The first HHWS was actually implemented in the city of Philadelphia in the United States in 1995. In this system, local city staff work with the National Weather Service (NWS) to determine when a heatwave is imminent.

After an alert is issued, the Philadelphia Health Department contacts news organizations with tips on how vulnerable individuals can protect themselves. People without air conditioning are advised to seek relief from the heat in shopping malls, senior centers and other cool spaces.

Friends, relatives, neighbors and other volunteers are also encouraged to make daily visits to elderly people during the hot weather, ensuring the most susceptible individuals have sufficient fluids, proper ventilation and other amenities to cope with the weather.

After the success of Philadelphia, similar tailor-made systems are being implemented for the 50-60 cities in the U.S. with a population of more than 500,000 and a local meteorological office, the guidance notes.

The NWS reports that heat is typically the leading cause of weather-related fatalities each year.


Check out Insurance Information Institute (I.I.I.) facts and statistics on drought and heatwaves here.

Actuarial Tool Adjusts for Climate Change

Insurance Information Institute (I.I.I.) chief actuary James Lynch  on an innovative actuarial approach.

It was a record-breaking rainy day in Colorado Springs when I attended a panel last month describing a new climate index the actuarial community is introducing.

The 1.58 inches of rain that fell May 19 almost doubled the previous record for that day. The Actuaries Climate Index (ACI)—a joint effort between the  Casualty Actuarial Society (CAS), the American Academy of Actuaries, the Canadian Institute of Actuaries, and the Society of Actuaries—is intended to monitor how often extreme events — blistering heat, shivering cold, record winds and rain — strike 12 regions in North America.

It addresses an interesting conundrum about insurance and climate change. Given that the climate is changing — though quite a few in the industry dispute that – how can insurance incorporate the change into pricing?

The ACI, which will be introduced later this year, tries to address that. It will measure how many severe events occur every quarter. Since catastrophes are an important component of claim costs, changes in the long-term trend can affect insurance prices.

As I wrote for the CAS:

The index is an educational tool that could help pricing actuaries incorporate long-term trends into their mathematical models; it could also help actuaries and others working in enterprise risk management by quantifying the risk in a subtle, long-term trend.”

Insurance prices are famously based on historical data, trended forward. The index would help show whether extreme events are becoming more or less common, and actuaries could trend this information forward to set rates.

Actuaries have been working on the index for a couple of years. Historical data has shown that over the past few years, the frequency of extremely hot days has increased, while the frequency of extremely cold days has decreased. The overall ACI climbed from the 1990s on, though it appears to have leveled off in recent years.

In its Facts and Statistics section, the I.I.I. gives comprehensive snapshots about catastrophes, both in the United States and worldwide.

Irrational Exuberance

Tomorrow is Pi Day, and a very special one writes I.I.I. chief actuary Jim Lynch.

For one second the date and time will represent pi’s first 10 digits (3/14/15 9:26:53), a moment both trivial and mnemonic.

Pi is an important number in insurance, as any actuary who has reflected on the matter will tell you.

Actuaries grapple with the mathematical discipline known as statistics, the heart of which is the normal distribution. The normal distribution is famous for its bell-curve shape, but relevant on March 14 is that the number pi appears in the formula for the normal distribution:


If I may be a bit hyperbolic, the mathematical foundation of insurance balances upon the number pi.

Pi is famously irrational, its digital expression neither ending nor repeating, but it is not the only irrational number in the normal equation. There’s the square root of 2 (1.414213562 . . .). There’s also the number e (2.71828 . . .), which you might remember if you studied logarithms in precalculus, but probably not.

So irrational numbers play an important role in insurance as elsewhere. Some, like pi, help us understand the world better. Others, like the irrationally small percentage of homeowners who purchase flood insurance, are less honorable, and the I.I.I. notes them in this infographic.

Why Insurer Climate Risk Responses May Vary

I.I.I. chief actuary Jim Lynch offers his perspective on how insurers are responding to climate change:

The insurance industry got a report card this week on a test I’m not sure they knew they were taking. And the grading curve was, in my opinion, harsh.

Ceres, a nonprofit group that promotes sustainable business practices, rated 330 insurers — life, health and property/casualty — on how well they are responding to climate change.

Before I wade further into the topic, it is important to acknowledge that insurance companies and their managers have a range of opinions on global warming that is as wide as the opinions of Americans overall on the topic. There is no insurance industry position, though there are individuals and companies with strong opinions — just as with all Americans.

On a four-point scale, nine companies got the highest mark (“leading”): Ace, Munich Re, Swiss Re, Allianz, Prudential, XL Group, The Hartford Financial Services Group, Sompo Japan and Zurich. Matthew Sturdevant of the Hartford Courant does a nice job rounding up how these firms earned their grade.

Ceres gave “minimal” or “beginning” rankings to 276 insurers, 84 percent on my calculator. The New York Times played up that aspect. But the analysis may be skewed because of the source of the rankings and how Ceres adapted that source.

Ceres took a National Association of Insurance Commissioners (NAIC) survey that six states require on climate change. The survey consists of eight yes-or-no questions, each of which follows up with why the insurer answered as it did. The follow-up questions are open-ended — companies can respond with as little or as much information as they like.

The questions help regulators when they assess a company’s enterprise risk management, specifically how hard a company looks for potential problems that might not hit them until years from now. Climate change certainly has that potential.

Ceres took those answers and graded them on its own criteria, resulting in six scores from 1 to 4, which it then re-summarized into a single grade.

Boiling a complex set of open-ended answers is tricky enough, but Ceres has, in my opinion, misused the NAIC survey, which is supposed to help regulators understand how well insurers are considering climate change in their risk management, not whether insurers are acting as stewards of the environment.

So it doesn’t seem like Ceres is giving a fair test. Insurers are answering questions on how climate change might affect their business then being rated on how their actions will reduce carbon emissions. It’s like being told to write an essay, then being graded on penmanship.

How could this skew results? Some insurers are minimally exposed to climate change, so it would not be prudent risk management for them to devote valuable resources to the issue. Medical malpractice writers are an obvious example. Climate change might be important to the world at large, but how relevant is it to the operation of a medical malpractice writer?

Property insurers are in a different boat, pardon the irresistible pun. Rising sea levels and growing weather extremes are important developments, and it would seem a prudent coastal writer would consider whether those trends will continue, abate or accelerate. A company that writes worldwide has still more to think about, as climate trends would affect other countries more than our own.

Seen that way, it makes perfect sense that some large, multinational insurers are concerned about climate change while small writers not exposed to property insurance are less so.

On the life/health side, there is a signal-to-noise problem. Climate change appears to have an impact on mortality, but it’s really small. A 2011 Brookings study suggested that climate change will increase U.S. age adjusted mortality rates by about 3 percent over the next 85 years or so. That rate has declined by 1 percent per year over the past 35 years. So the impact of climate change on mortality is likely to be overwhelmed by other forces at work.

That’s not to say that life expectancies outside the U.S. won’t be affected more. But a life insurer that only writes U.S. risks might not want to incorporate climate change-induced mortality changes from, say, Australia, into its business model.

Regardless, life insurers have a built-in mortality hedge in pairing annuity sales with life insurance. People who die sooner drive life insurance profits lower. But they push annuity profits higher, and vice versa. Combine that with the small impact of climate change on U.S. mortality and it makes perfect sense that a great many U.S. life insurers have decided that climate change doesn’t form a central part of their risk management strategy.

Health insurers are in a similar situation. Gradual changes in health have small effects on their business, and those changes can be easily adjusted to year by year. Pandemics are a bigger risk, so risk management efforts focus there.

That helps explain why health and life insurers didn’t score as high as property/casualty insurers. They have less at stake.

California’s insurance department doesn’t sound too concerned. Ceres relied on CA DOI information to compile its report, so there’s a good chance the Ceres researchers saw a 2013 press release that said this:

The results of this year’s survey are a positive sign for the insurance industry and the environment,” said Commissioner Jones. “It is encouraging to see that insurers are aware of the risks that a changing climate brings, and moreover they are taking steps to ensure their responses to these risks are sufficient to protect their business.”

More than 1,000 companies [Duplicates and multi-company insurance groups account for the difference between Ceres’ total and California’s.] were required to respond to the survey. The survey revealed that roughly 75 percent of insurers have a plan for identifying climate change-related risks that could affect their business, and are taking actions to mitigate these risks. Responses to the eight survey questions reveal that nearly every insurer is aware of the risks posed by a changing climate, and an overwhelming majority of insurers have incorporated mitigating practices into their business model.”

That sounds like an industry that is handling the issue prudently, even if it is not the way an environmental group would prefer.