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March 01, 2012 at 07:00 PM
As the headlines over extreme weather conditions and the cost of natural disasters swell, some insurance companies are rising to the challenge. Recent news stories indicate that a number of groups feel there is more to be done, and the industry may not be keeping up as much as they would like.
In early January, blogger/reporter Marc Gunther, who writes about sustainability and business, questioned how prepared the insurance industry is for climate change, considering its tremendous potential for financial ruin.
In an article for GreenBiz.com, Gunther looked at insurers of last resort, such as the Citizens Property Insurance Program in Florida, which provides coverage for coastal development not covered by private insurance, and the National Flood Insurance Program, which offers coverage for such events as the flood devastation caused by Hurricane Irene in areas not normally prone to such phenomena. These programs, he says, are currently $20 billion in the red. Those are taxpayer-supported programs, he points out, and, as such, leave all of us on the hook when disasters occur. Further, he adds, the NFIP not only insures in areas where private coverage can be largely unavailable, meaning there is no way to share the risk as commercial insurers do, it also “causes environmental damage by externalizing the risk of building in ecologically sensitive floodplains.”
Such programs may provide protection to developers and homeowners in disaster-prone areas, he says, but at a cost to everyone that is basically unsustainable. Citing the opinion of Sean McGovern, general counsel and director of North America for Lloyds of London, Gunther quotes him saying last fall, “We don’t believe that the U.S. has the balance between industry and government intervention right. The cost to the U.S. taxpayer is huge and is not sustainable.”
While European reinsurers, Gunther wrote on his blog at MarcGunther.com, have been actively warning about the risks of climate change for the past several years, American companies have been largely silent, despite the record cost of natural disasters in 2011.
In 2009, the National Association of Insurance Commissioners (NAIC) announced that it would require insurance companies to complete a survey intended to indicate their potential exposure to climate change and any steps they might be taking to mitigate such exposure. (See “Out in the Open,” Investment Advisor, May 2009.) Originally, the survey was intended to be mandatory and public, but it was instead scaled back and made voluntary and confidential in 2010.
