With flooding from hurricane Ida in the east and fires raging on the west coast as a backdrop, the U.S. Treasury Department issued a solicitation for input from the insurance industry as to the effect of climate change on the industry both now and into the future.
The Aug. 31 announcement called out several areas of concern for companies both in terms of insuring risks and as participants in the economy as investors.
“For example, the U.S. life insurance sector is one of the largest investors in the U.S capital markets, with over $4.7 trillion in investments held in general accounts at year-end 2020,” the release said.
Why is the federal government seeking commentary?
The Treasury is seeking input on behalf of the Federal Insurance Office (FIO), with the goal of understanding which areas of the climate change discussion are of the highest concern for the insurance industry. While the government funds data collection for a variety of purposes and uses, the FIO wants to be sure it’s searching out the right kind of data and adequately filling the research needs of insurers. After all, junk input equals junk output.
The federal government’s announcement conceded that the exponential increase in catastrophic events has prompted more concern than ever that the current economy – of which insurance is a part – is unsustainable. The Treasury cites a 2020 report from the Financial Stability Board, and breaks climate risks to the insurance industry into three categories:
- Physical risks are “the possibility that the economic costs of the increasing severity and frequency of climate-change-related extreme weather events, as well as more gradual changes in climate, might erode the value of financial assets, and/or increase liabilities.”
- Transition risks can arise from the technological, market, and policy changes needed to adjust to a low-carbon economy and their effects on the value of financial assets and liabilities. Depending on the nature, speed, and focus of these changes, transition risks may pose varying levels of financial and reputational risk to organizations.
- Liability risks may “arise when parties are held liable for losses related to environmental damage that may have been caused by their actions or omissions.”
These three risks are at the heart of the FIO concerns – while the office is well aware that these will be increasingly important to insurers and the industry, they admit the data is missing to conclusively say to what degree and in what priority. In an industry based on actuarial tables, the lack of data is not ideal:
“The lack of available data complicates the ability to conduct such assessments. Government and private sector stakeholders have noted the significant issues caused by the lack of available data to assess climate-related financial risk within the insurance sector. These stakeholders could all potentially benefit from high-quality, consistent, comparable, and reliable data for their risk management, disclosures, and forward plans to assess and address climate-related financial risks.”
Future for P&C insurers, wider insurance industry
There’s no question that, as extreme climate events increase, the industry will need to adjust. Most industry conferences and panels include a discussion of climate change and its intersection with P&C insurers, and the challenges of a legacy industry facing such a dramatic worldwide phenomenon.
While federal data-gathering efforts will no doubt be a step forward, there are questions about how such a fragmented industry will evolve to meet this challenge. A federal takeover of the industry seems unlikely and unwelcome, but there’s no question that quick, coordinated change will be necessary.
An April 2021 column in PropertyCasualty360 by Preston Nanney called out data as a crucial first step the P&C industry would face in transitioning to a more realistic and sustainable model. But his prognosis for insurers on the current course of action remains grim:
“Among some corners of the industry, there remains an unspoken hope, disguised in the humility of having witnessed many market cycles, that things will either return to normal or that the economy will naturally adapt despite all evidence to the contrary.”
Nanney calls out the National Flood Insurance Program and its affordability as unsustainable, suggesting that the program will need to pressure regions to disincentivize building in potential flood areas. He also points to underwriters as needing to rely less on historical data and more heavily weight their coverage with modern models that predict future patterns.
A recent Insurance Journal article included a global perspective, with sources calling on more insurers worldwide to stop underwriting coverage for oil and gas projects, particularly those that contribute more heavily to climate change such as oil shale and Arctic drilling. One certainty: Acting now may mean short-term losses or foregone opportunities, but waiting to act will mean drawn out, unavoidable consequences for us all.
For carriers, MGAs, and agencies looking to move quickly, AgentSync Manage may be part of the solution – we facilitate teams that move with urgency, and we too have an appreciation for foregoing garbage data. Whatever your future holds, if you’re interested in a partnership that brings you accuracy and speed, check out what AgentSync can do for you or book a demo with us.