Is Climate Change Research Starting to Affect the Insurance Markets?

Is Climate Change Research Starting to Affect the Insurance Markets?

February 11, 2009 12:08
by J. Wylie Donald

We wrote last week about the state of Florida's insurance market with the withdrawal of State Farm from Florida, potentially driving 700,000 policyholders to the state-funded Citizens Property Insurance Corporation. We'd like to follow up on one aspect of that issue - hurricane risk driving an insurer out of the market - and look at a report in Business Insurance about reduced capacity in the offshore windstorm market. Specifically, Advent Capital (Holdings)) PLC has stopped writing that coverage. This is part of a larger trend that we are following in the marketplace. According to the article, "capacity could shrink as much as 50%, driven by the worldwide recession, decreased asset values resulting from the reduced price of oil, shrunken reinsurance capacity and losses from Hurrican Ike." See Business Insurance (Jan. 19, 2009).

Puzzlingly, omitted from the list of reasons is an evaluation of the weather. One would have to think that weather entered into the decision as only weeks before the announcement of Advent's pullout, two research groups independently concluded that the 2009 Atlantic Hurricane season would be "above average." The Tropical Meteorology Project at Colorado State University predicts fourteen named storms, seven of which will be hurricanes and three of those will be intense. Another group, Tropical Storm Risk, puts the activity in the top one-third historically.

What we take from Advent's decision (as well as State Farm's) is that the industry may be relying as well on behind the scenes research into, and evaluation of, climate change risk, which entities are using to make business decisions. Swiss Re and Munich Re have been conducting climate research for 30 years; others are beginning to catch up and, to quote Swiss Re's senior climate change advisor, Andreas Spiegel, the "end goal is to quantify interconnected risks and to integrate the results into ... risk models, pricing, capacity and hedging strategy." See Business Insurance (Nov. 17, 2008).

Reinsurers and insurers recognize the value and importance of climate change knowledge; it is driving their business decisions. It behooves others to follow suit, especially their insureds.

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