The analyst: Preparing insurers for a stormy future
Feb. 15, 2012
Climate change will likely intensify storm surges, wildfires, drought and more, putting the insurance industry in an economic bind.
Sharlene Leurig is working to find a more sustainable – and profitable – future.
Climate Query For Sharlene Leurig
Interview conducted and condensed by Rae Tyson
Editor's note: Climate Query is a semi-weekly feature offered by Daily Climate, presenting short Q&A's with players large and small in the climate arena. Read others in the series here.
The insurance industry faces a tumultuous future as storms, wild fire, drought, sea level rise and storm surges intensify as humans alter the energy balance of the atmosphere with greenhouse gas emissions. Last year the United States saw 14 separate weather-related disasters causing $1 billion or more each in economic damage, according to the National Oceanic and Atmospheric Administration.
Sharlene Leurig manages the insurance program for Ceres, a nonprofit coalition of investors and environmental groups working to incorporate long-term environmental and social risks into the market. She spoke in the fall at the Society of Environmental Journalists conference in Miami. And as she rattled off the challenges facing the industry, she had veteran reporters scrambling for notebooks. The statistics she offered are not good news for taxpayers.
"The largest insurance company in the state of Florida is the state of Florida," she said. "And the liability that the state holds is so huge that ... the next time the big one rolls in the system will bankrupt itself."
It's not just Florida. Massachusetts, Texas, the Carolinas and other coastal states are starting to self-insure as insurance carriers exit the market in the face of higher risk, she said.
"That's a bleak future," she added. "We don't actually have the money to adapt to climate change – to adapt to more intense droughts and floods and wildfires – because we're burning thru GDP trying to recover from the last disaster just to encounter the next one."
DailyClimate.org caught up with Leurig via phone at her office in Austin, Texas.
How are insurers preparing to cope with the impact of greater weather-related claims?
Insurers have gotten by for 300 years by muddling through. And most insurers think they can simply muddle through climate change.
Given the insurance industry's worldwide investments, how could the industry's response to climate change affect the global economy?
Most people don't realize just how important the insurance industry is as a source of investment capital. Globally, the industry has around $23 trillion in assets - more than the annual GDP of the United States. If weather becomes so volatile that insurers shift investments to cash or short-term treasuries, the result could be the loss of a major source of capital for infrastructure projects.
But insurers discouraged some construction – and encouraged better building design – after Hurricane Andrew hit Florida in 1992. Could they exert similar influence on adapting to climate change?
They need to take a more vital role in this, otherwise we are not going to have any more insurable markets. They have been very tepidly sticking their toes into developing building codes, developing land use plans.
The late Paul Epstein advocated efforts to leverage industry to diminish climate impacts and improve environmental health, particularly in poorer countries. Is there a business opportunity for insurance companies here?
Swiss Re and other companies are very active on this issue. They understand there is a significant risk but they also recognize there are significant opportunities.
Consumers shop for insurance based on price. Won't market pressures force insurers to simply bail from vulnerable locales rather than raise rates?
So far, that has been the way that the insurance industry in the U.S. has approached risk. When a risk gets too high in the area and they cannot increase pricing, they just move out of that area.
Last week regulators in California, New York and Washington said they will require companies to disclose risks their businesses and customers face from severe storms and wildfires, rising sea levels and other consequences of climate change. Your thoughts?
That's a good thing. Finally all of the largest insurers in the U.S. will have to share with their regulators how they are building climate change into their business.
Photos, top to bottom: Hurricane Andrew (1992) damage in Florida, NOAA; Hurricane Irene (2011) damage in Bethel, Vt., U.S. Fish and Wildlife Service; Plywood pierces a palm tree in Homestead, Fla., post-Hurricane Andrew, NOAA; Rescuers save a stranded motorist during record flooding in Mississippi in 2003, National Weather Service (Fig. 3); The Gap Fire sends smoke over Santa Barbara (2009), lunita lu/flickr.
Rae Tyson pioneered the environmental beat at USA Today in the 1980s and today restores and races vintage motorcycles in central Pennsylvania. Climate Query is a semi-weekly feature offered by DailyClimate.org, a nonprofit news service that covers climate change.
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