Extreme Weather Can’t ‘Surprise’ Insurance Companies

Severe weather has been clobbering insurance companies, and the headlines just keep coming. “Drought to cost insurers billions in losses,” said the Financial Times a few days ago. “Many U.S. hurricanes would cause $10b or more in losses in 2012 dollars,” the Boston Globe said about the latest hurricane forecasts. “June’s severe weather losses near $2 billion in U.S.,” said the Insurance Journal earlier this year.

This year’s extreme events follow the world’s costliest year ever for natural catastrophe losses, including $32 billion in 2011 insured losses in the United States due to extreme weather events. This is no short-term uptick: insured losses due to extreme weather have been trending upward for 30 years, as the climate has changed and populations in coastal areas and other vulnerable places have grown.

Credit: USFWS/flickr

The U.S. insurance industry continues to be “surprised” by extreme weather losses. But the truth is that weather extremes are no longer surprising. Back-to-back summers of devastating droughts, record heat waves and raging wildfires are clear evidence of this. Last year’s crazy weather triggered near record underwriting losses and numerous credit rating downgrades among U.S. property and casualty insurers.

And in the face of a changing climate, such events can be expected to increase in number, and severity.  It’s time for insurance companies to recognize this new normal, and incorporate it into their business planning—for the sake of their shareholders, their industry’s survival, and the stability of the U.S. economy.

Ceres, a business sustainability leadership organization, has been researching the effects of climate change and severe weather on the insurance sector. In a report to be released next month, titled Stormy Future for U.S. Property and Casualty Insurers, we will detail our recommendations for insurance companies, investors and regulators to help strengthen the insurance sector so it can better weather the challenges ahead.

For insurance companies, using catastrophe models that can better anticipate probable effects of climate change on extreme weather events are key. And especially in vulnerable markets, insurers’ guidance on insurability should inform decisions that communities make on land-use planning, infrastructure decisions, and building codes.

Insurers can also encourage the transition to a low-carbon economy—one built to forestall the worst effects of climate change—by offering products and services that encourage clean and efficient energy, encouraging customers to adopt climate-change mitigation plans, and encouraging policymakers to act to reduce carbon pollution.

This would not be the first time insurance companies have helped change American society. By making insurance contingent on smoke detectors, insurers cut down on deaths and losses from building fires. By backing seat belt laws and including seat belt violations in rate calculations, they helped save lives on the road.

By engaging fully on climate change and energy policy—inside and outside of the boardroom – insurance companies can lead the way once again. It would be the right thing to do, both for their business, and for our future.

Reprinted with permission. This story first appeared on Forbes.com