As the frequency and severity of natural disasters have increased in recent decades – largely due to the impact of climate change – the insurance industry has taken a hit.
According to a 2021 report from the national Insurance Information Institute, average annual insured losses from tornadoes, hurricanes, severe storms, wildfires, floods and other natural disasters have risen nearly 700% since the 1980s, from $7.6 billion to $88.4 billion.
As a result, property and casualty insurance companies across the U.S. have had to pay out more in claims, raise premiums and, in some cases, pull out of markets like Florida and California that are more prone to hurricanes and other severe weather.
As insurance companies look to sustain profitability and growth, climate-related risk is a factor that can’t be ignored. That’s certainly true for at least for one property and casualty insurance company based in southeastern Wisconsin that is actively expanding its geographical footprint.
Sheboygan-based Acuity currently covers more than 130,000 businesses and nearly half a million homes and private passenger vehicles in 31 states and is on track to expand into another eight to 10 states over the next decade. The company will enter Maryland as its 32nd state next year.
To find out how escalating environmental challenges are impacting Acuity’s expansion strategy – and the insurance industry at large – BizTimes Milwaukee associate editor Maredithe Meyer conducted a Q&A with Acuity president Melissa Winter.
BizTimes: How does climate-related risk help shape Acuity’s expansion strategy? What role do regulatory frameworks and government policies play in your expansion choices?
Winter: “Acuity researches many different factors when determining where we expand. Insurance is regulated at the state level so understanding the competitive and regulatory environments for each state is key. Climate-related risk is also an important element of adequately pricing for exposures in an area. Insurance companies need to file their rates with and get approval from the states in which they do business. Adequate pricing is important to cover loss trends for exposures in order to provide superior protection and service to our policyholders over the long term.”
Are there certain states/regions Acuity will not target for expansion due to climate and associated environmental risks?
“No, decisions are not made solely on one item affecting a state. However, we do seek to avoid extreme climate-related risks where possible. We try to avoid exposures that cannot be adequately evaluated or have unacceptable levels of uncertainty. Increased insurance regulation may lead to changes in the underwriting strategy for a given location and preclude us from considering a state entirely.”
Of the states Acuity currently does business in, which are considered most risky due to climate and which are considered least risky?
“Each state we write in brings its own unique climate-related risks from wind, hail and wildfires to floods, earthquakes and winter related perils. Insurance is all about managing risk and being prepared to handle whatever that risk might look like for our customers. Simply put, it is why we are in business. Understanding the various weather-related risks in each state, diversifying the risk across our geographic operating territory and pricing adequately for given exposures are ways insurance carriers manage and mitigate risk.”
How has the gradually increasing frequency and severity of natural disasters in recent years impacted business for Acuity?
“All property and casualty insurance carriers are impacted by the inherent unpredictability of natural disasters. Both the frequency and severity of storms, wildfires and floods in the U.S. have been more volatile during the past decade. Other factors impacting severity include more people living in high-risk areas, population growth in areas with weaker enforcement of building codes and urban expansion. As the frequency and severity of these events increase, so too does the total amount of loss dollars carriers like Acuity need to pay for claims from covered policyholders. Core to our strategy is the incorporation of weather and climate variability (and other loss trend) data from our operating territory into our underwriting and pricing decisions.”
What are the methods or tools Acuity uses to assess environmental risk and identify regions vulnerable to environmental hazards?
“Acuity uses various analyses and methods, including proprietary and third-party computer modeling processes, to evaluate our climate-related risks and make underwriting, pricing and reinsurance decisions designed to manage the company’s exposure to catastrophic events. We continue to evaluate and adopt new tools that assist us in assessing susceptibility to perils such as wildfires. Experience from past environmental events also shapes our strategies moving forward in anticipation of the next weather-related event.”
What else should business and individual policy holders know about the impact climate change is having on how and where insurers are doing business?
“Property and casualty insurance is a business dedicated to managing risk. While climate change is concerning, carriers have multiple ways to combat and mitigate their exposure to losses. At Acuity, this includes having a strong capital base to intelligently manage and support the risks we assume, including weather-related perils. Adequately pricing for exposures as well as a disciplined approach to underwriting and risk management are key to long-term profitability of the carrier and to ensure superior protection and service to policyholders for many years into the future.”
