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.

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:

NormalDistribution

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.

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.

As world leaders gather to discuss climate change at the United Nations this week, a new report from the Global Reinsurance Forum (GRF) says risk prevention and mitigation measures as well as risk transfer are the key to managing this threat.

According to the report, up to 65 percent of climate risks can be averted by adaptation measures including infrastructure development, technology advancements, shifts in systems and behaviors such as improved building codes and land use management, and financial measures.

The global re/insurance industry plays a vital role in planning and implementation of such measures. As the GRF says:

Future insurability will depend on well-planned adaptation: without it, property insurance will become less affordable and less accessible.

The world cannot simply insure its way out of the effects of climate change, but adaptation allows the global burden of potential loss to be reduced and shared, helping to keep the most vulnerable from being overwhelmed.”

The report points out that the reinsurance industry is particularly exposed to the impact of climate change given its role as an ultimate destination of risk:

The industry identified climate change as an emerging risk more than twenty years ago; it has since become a key component of every company’s long-term risk management strategy.”

Citing a 2012 IPCC report, the GRF notes that extreme weather events, such as storms, floods, droughts, heat waves as well as rising sea levels, crop failures and water shortages have become more numerous and severe.

Reinsurers can make an important contribution by developing protection and mitigation-finance solutions to address the specific challenges that climate change presents.

At the same time, the GRF says reinsurers are advancing understanding of climate change-related risk through the development of natural catastrophe models and via collaboration with universities and scientific institutions. They are also monitoring relevant phenomena such as urbanization, population concentration, property and commercial activity in high-risk areas along the coasts and flood plains.

Check out a great I.I.I. backgrounder on climate change and insurance issues here.

A new study from NOAA reminds us that as sea levels rise, it no longer takes a strong storm or hurricane to lead to flooding.

So-called “nuisance flooding” – which results in public inconveniences such as frequent road closures, overwhelmed storm drains and compromised infrastructures – has increased on all three U.S. coasts by between 300 and 925 percent since the 1960s, according to NOAA.

Eight of the top 10 U.S. cities that have seen an increase in nuisance flooding are on the East Coast.

Annapolis and Baltimore, Maryland, lead the list with an increase in number of flood days of more than 920 percent since 1960.

New Jersey’s Atlantic City and Sandy Hook also made the top five with an increase in flood days of more than 600 percent, NOAA reports.

Port Isabel, Texas, along the Gulf coast, showed an increase of 547 percent, and nuisance flood days in San Francisco, California, increased by 364 percent.


Dr. William Sweet, oceanographer at NOAA’s Center for Operational Oceanographic Products and Services (CO-OPS) and the report’s lead author notes:

Flooding now occurs with high tides in many locations due to climate-related sea level rise, land subsidence and the loss of natural barriers. The effects of rising sea levels along most of the continental U.S. coastline are only going to become more noticeable and much more severe in the coming decades, probably more so than any other climate-change related factor.”

Scientists took data from 45 NOAA water level gauges with long data records around the country and compared that to reports of number of days of nuisance floods.

The study defines nuisance flooding as a daily rise in water level above the minor flooding threshold set locally by NOAA’s National Weather Service, and focused on coastal areas at or below these levels that are especially susceptible to flooding.

NOAA concludes that any acceleration in sea level rise that is predicted to occur this century will further intensify the impact of nuisance flooding over time, and will further reduce the time between flood events.

It also warns that while event frequencies are accelerating at many U.S. East and Gulf coast gauges, many other locations will soon follow regardless of whether there is an acceleration in relative sea level rise.

Check out I.I.I. facts and statistics on flood insurance and climate change and insurance.

Climate change is among the five most likely and most potentially impactful global risks, according to the just-released World Economic Forum (WEF) 2014 Global Risks Report.

The report assesses 31 risks that are global in nature and have the potential to cause significant negative impact across entire countries and industries if they take place.

An analysis of the five risks considered most likely and most impactful since 2007 shows that environmental risks, such as climate change, extreme weather events and water scarcity, have become more prominent since 2011 (see chart above).

This suggests a pressing need for better public information about the potential consequences of environmental threats, the WEF says.

Concern about socio-economic risks such as income disparity, unemployment and fiscal crises has become more prominent over the years.

The report reveals that fiscal crises and structural unemployment and underemployment are among the most impactful risks while the latter also feature among those most likely to occur. This has knock-on effects on income disparities, which is regarded as the overall most likely risk, the WEF notes.

Cyber attacks and the breakdown of critical information infrastructure also feature among the most prominent risks in this year’s report.

The WEF notes:

This arguably reflects the increasing digitization of economies and societies, where rising dependence on information and data, as well as the systems to analyze and use them, has made attacks more likely and their effects more impactful.”

WEF note: Global risks may not be strictly comparable across years, as definitions and the set of global risks have been revised with new issues having emerged on the 10-year horizon. For example, cyber attacks, income disparity and unemployment entered the set of global risks in 2012. Some global risks were reclassified: water supply crises and income disparity were reclassified as environmental and societal risks, respectively, in 2014.

The report is published in collaboration with Marsh & McLennan Companies, Swiss Re, Zurich Insurance Group, National University of Singapore, Oxford Martin School, University of Oxford, Wharton Risk Management and Decision Processes Center, University of Pennsylvania.

With two months to go to the one-year anniversary of Hurricane Sandy, a federal task force created after the storm has issued a report that’s getting a lot of media coverage.

The plan includes 69 policy initiatives, of which a major recommendation is to build stronger buildings to better withstand future extreme storms amid a changing climate.

Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, and chair of the task force, notes:

Last year alone, there were 11 different weather and climate disaster events across the United States with estimated losses exceeding $1 billion each. We know that every dollar we spend today on hazard mitigation saves us at least $4 in avoided costs if a disaster strikes again. By building more resilient regions, we can save billions in taxpayer dollars.”

The report makes clear that rebuilding to outdated standards is no longer an option given the impact of climate change and rising sea levels:

No single solution or set of actions can anticipate every threat, but decision makers at all levels must recognize that climate change and the resulting increase in risks from extreme weather have eliminated the option of simply building back to outdated standards and expecting better outcomes after the next extreme event. There is clear evidence at the national level that investments made to mitigate risk have achieved significant benefits.”

One section of the plan focuses on addressing insurance challenges, understanding and affordability.

Specifically, the taskforce recommends: streamlining payouts to policyholders in the wake of disaster; improving policyholder awareness of factors that affect flood risk and insurance rating decisions; and studying affordability challenges of flood insurance as the National Flood Insurance Program (NFIP) transitions toward full risk rates.

PC360 has more on this story.

Check out I.I.I. facts and statistics on flood insurance here.

We start the week with a new animation from NASA that shows the increasing risk of wildfire activity across the United States in the coming decades.

An article on the NASA website notes that with satellite and climate data, scientists have been able to track an increase in dry conditions since the 1980s.

Climate projections suggest this trend will continue, increasing the risk of fire in the Great Plains and Upper Midwest by the end of the 21st Century, according to NASA.

NASA explains:

The newest generation of climate models project drier conditions that likely will cause increased fire activity across the United States in coming decades. These changes are likely to come in a number of different forms, including longer fire seasons, larger areas at risk of wildfire, and an increase in the frequency of extreme events – years like 2012 in the western United States.”

Fire seasons are starting earlier due to warmer spring temperatures and earlier snowmelt, and they are lasting longer into the fall, NASA notes.

It cites NIFC statistics indicating that 100,000-acre wildfires are becoming increasingly frequent.

Here’s the animation:

Hat tip to CNET for its blog post on this story.

Check out I.I.I. facts and statistics on wildfires, and a backgrounder on climate change insurance issues.

As we basked in 70 degree temperatures in parts of the Northeast on Sunday, just a few days in the wake of a nor’easter and nearly two weeks after Hurricane Sandy, it’s understandable that the topic of climate change is trending online.

In a post over at the Wall Street Journal’s Metropolis blog, Eric Holthaus asks the direct question: did climate change factor into recent storms?

He cites the connection between long-term sea level rise and the enhanced coastal flooding that devastated parts of Greater New York as evidence of a much clearer link between Sandy and climate change.

New York Harbor’s average water level is now 12 to 18 inches higher than it was in the 1880s, Holthaus says, and scientists estimate about 8 to 12 inches of that is a direct result of global warming. So, more people were affected in the tri-state during Hurricane Sandy than would have been if the same storm had struck in a world without climate change.

He concludes:

For the victims of Hurricane Sandy, it may come as little consolation, but history may show them to be—with absolute certainty—among the first people in the United States directly affected by climate change.”

In another post over at Scientific American’s Observations blog, Mark Fischetti writes that scientists, journalists and even insurers are starting to drop the caveats, and simply say that climate change is causing big storms.

Fischetti suggests that as scientists collect more and more data over time, more of them will be willing to make the same data-based statements.

A recent study by Munich Re reported that North America was most affected by the rising number of natural catastrophes. Specifically, it noted a nearly five-fold increase in the number of weather related loss events in North America for the past 30 years, compared with an increase of 4 in Asia, 2.5 in Africa, 2 in Europe and 1.5 in South America.

In a press release announcing the study, Munich Re said:

Climate change particularly affects formation of heat-waves, droughts, intense precipitation events, and in the long run more probably also tropical cyclone intensity. The view that weather extremes are becoming more frequent and intense in various regions due to global warming is in keeping with current scientific findings…”

Munich Re added:

Up to now, however, the increasing losses caused by weather related natural catastrophes have been primarily driven by socio-economic factors, such as population growth, urban sprawl and increasing wealth.”

Check out I.I.I. information on climate change and insurance.

A tropical storm watch is now in effect for Southeast Florida and the Upper Keys as Tropical Storm Sandy continues to strengthen and moves towards Jamaica.

In its 8am EDT outlook, the National Hurricane Center (NHC) says Sandy is expected to become a hurricane before it reaches Jamaica and Cuba, later today.

The NHC notes:

Tropical storm conditions are expected to reach Jamaica this morning…with hurricane conditions expected by this afternoon. Tropical storm conditions are expected in portions of Haiti by this afternoon. Hurricane conditions are possible in eastern Cuba by this evening. Tropical storm conditions are expected in the central Bahamas by early Thursday…and in the northwestern Bahamas by Thursday afternoon.”

It adds:

Tropical storm conditions are possible along the southeast Florida coast…the Upper Keys…and Florida Bay by Friday morning.”

Jamaica, Haiti and the Bahamas are members of the Caribbean Catastrophe Risk Insurance Facility (CCRIF), a multinational insurance pool developed by the World Bank. Funded by premiums paid by participating countries, the facility provides early payout to members after a major hurricane or earthquake.

Check out I.I.I. hurricane facts+stats.

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