Category Archives: Climate Change

The Week in a Minute, 10/6/17

The III’s Michael Barry briefs our membership every week on key insurance related stories. Here are some highlights:

  • A lone gunman killed 58 people, and injured hundreds of others, in Las Vegas in the single deadliest mass murder in U.S. history on Sunday, October 1. The tragedy is already raising insurance liability issues.
  • The Trump administration is asking Congress to authorize a $29 billion disaster relief package for costs associated with 2017’s Hurricanes Harvey, Irma, and Maria.
  • In a 6-3 vote, The Financial Stability Oversight Council (FSOC) rescinded its determination that American International Group (AIG) is a systemically important financial institution (SiFi).

“London Calling…”

I.I.I.’s James Ballot, Senior Director of Marketing and Content Strategy, contributes these highlights from the IIS Global Forum 2017.

Established millennia ago and since visited continually by perils ranging from fire, flood, pestilence, civil unrest and wave upon wave of attacking foreign enemies, it’s no great stretch to call London the de-facto global headquarters of resilience. So it’s fitting that London should host this year’s International Insurance Society’s (IIS) Global Insurance Forum (GIF), given that the event’s focus was set squarely on Global Resilience and the Role of Insurance.

At the Forum more than 500 delegates and other attendees gathered to set a truly global agenda for how insurance and other parties–NGOs, policymakers, businesses, educational institutions, the media, among others—will respond to challenges ranging from political instability to cyberthreats to the need to create the right talent infrastructure to master the technological changes presently shaping our industry to innovating ways to address threats posed by intensifying natural catastrophe cycles.

Among the highlights:

  • A video address from HRH The Prince of Wales to open the Day 3 Insurance Development Forum (IDF) in which he outlines four key areas where insurance can assume leadership in fostering resilience.
  • Wide-ranging discussions of the “insurance gap” and how narrowing it is essential to building financial resilience against cyberattacks, as well as mitigating uninsured natural catastrophe losses among vulnerable populations in developing nations.
  • The Nature Conservancy, a top-line partner at this year’s GIF, introduced an innovative insurance product underwritten by Swiss Re that insures coral reefs and other natural coastal fortifications.
  • Insurtech and emerging innovations are changing the business—mostly by creating a climate in which, as one insurance fund capital manager asserted, insurance and tech startups can partner to help make “yesterday’s risks insurable today.”

A lot to cover in a single posting, to be sure. For a deeper dive into the goings-on at IIS Global Forum, Asia Insurance Review (AIR) offers gavel-to-gavel coverage of the event, as well as valuable insights from Forum participants.

 

 

Coastal resilience, or putting an insurance policy on nature

Our earlier post Working with nature to build resilience to hurricanes discussed how insurers look to natural infrastructure like coastal wetlands and mangrove swamps to mitigate storm losses.

The Mesoamerican Reef, which runs south for some 700 miles from the tip of the Yucatán Peninsula protects coastal communities and property by reducing  the force of storms, but its corals require continued repairs.

For every meter of height the reef loses, the potential economic damage from a major hurricane triples, according to The Nature Conservancy (TNC).

Now thanks to TNC and Swiss Re, the reef is about to get its own insurance policy.

From Bloomberg:

“After Hurricane Wilma struck in 2005, causing $7.5 billion of damage in Mexico, beachfront hotel owners began paying extra taxes to the state government to handle beach restoration and protect the reef.”

TNC has proposed a different approach:

“The extra money paid by the hotel owners to the government could be converted into premium payments to Swiss Re to cover the reef. The policy would be what’s called parametric insurance, in which a large hurricane would trigger near-immediate payouts. By having the money arrive quickly, reef repairs could begin sooner.”

From Artemis blog, via TNC:

“One of the most promising new developments to maximize the value of nature is the possibility of putting an insurance policy on habitats like reefs and beaches. By combining insurance and new science, we can protect and improving the health of reefs and beaches so they can continue to protect us.”

 

Working with nature to build resilience to hurricanes

Strong buildings, levees and seawalls play an essential role in increasing resilience to floods and hurricanes, but insurers are also looking to natural infrastructure to mitigate storm losses.

As the 2017 Atlantic hurricane season officially begins, an ongoing effort by insurers, risk modelers, environmental groups and academics is focused on understanding how natural defenses like coastal wetlands and mangrove swamps can reduce the impact of storms.

A 2016 study led by researchers at the University of California, Santa Cruz, the Nature Conservancy and the Wildlife Conservation Society, found that more than $625 million in property losses were prevented during Hurricane Sandy by coastal habitats in the Northeast.

Where wetlands remain, the average damage reduction from Sandy was greater than 10 percent. Researchers expect analysis of the effects of Hurricane Matthew will demonstrate the value of similar protections.

The study was conducted in association with Risk Management Solutions and Guy Carpenter, with funding from the Lloyd’s Tercentenary Research Foundation and additional support from the Science for Nature and People Partnership.

Business Insurance has more on this story here.

This is just one example of how reinsurers and insurers collaborate with different sectors to build resilience and mitigate storm damage.

For example, Swiss Re is working with the Nature Conservancy to explore the economics of nature-based coastal defenses.

I.I.I. CEO Sean Kevelighan writes about how the insurance industry collaborates with different groups to build resilience to natural disasters in this article on PC360.

Check out I.I.I. issues update Climate Change: Insurance Issues.

WEF: Collaboration Imperative On Global Risks

The World Economic Forum (WEF) is calling for a redoubling of efforts to protect and strengthen systems of global collaboration in the face of increasingly disruptive risk trends.

In its just-released Global Risks Report 2017, the WEF warns that risk drivers such as income inequality, polarization of societies, and climate change need to be addressed collaboratively if solutions are to be found to the world’s most complex problems.

Nowhere is cooperation more urgent than in addressing climate and environmental risks, the WEF said. While important strides have been made in the past year, the pace of change is not fast enough and more needs to be done.

The WEF cited the Paris Agreement on climate change now ratified by 110 countries, and the landmark agreement to curb CO2 emissions from international aviation as important examples of global cooperation in 2016.

But political change in the United States and Europe is putting this progress at risk.

“This is a febrile time for the world. We face important risks, but also opportunities to take stock and to work together to find new solutions to our shared problems. More than ever, this is a time for all stakeholders to recognize the role they can play be exercising responsible and responsive leadership on global risks.”

The environment dominates the global risks landscape outlined in the WEF report, with extreme weather events emerging as the single most prominent global risk and climate change the number two underlying trend this year.

Society is also not keeping pace with technological change, the WEF noted. While new and emerging technologies can provide solutions they also exacerbate risks.

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Artificial intelligence and robotics were identified as having both the highest potential for negative consequences and also the greatest need for better governance in this year’s risk survey.

The private and public sectors need to work together and collaborate to address the challenges of the Fourth Industrial Revolution, the WEF said.

“It is critical that policy-makers and other stakeholders – across government, civil society, academia and the media – collaborate to create more agile and adaptive forms of local, national and global governance and risk management.”

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.

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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).

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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.”

And:

“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.”

AverageP:CRate2001-2015

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.