Lloyd’s of London, a global re-insurer, recently published a report titled "Adapt or Bust," which says insurers and re-insurers need to better account for the effects of global warming. Contrary to the viewpoints of conservative political pundits who are debating the issue, there is mounting evidence that the climate is changing, and mankind’s consumption habits are driving that change, the report says.
According to the report, models formerly used for predicting weather patterns can no longer be trusted, because they are based on models that might no longer be accurate.
The report also says recent natural disasters such as Hurricane Katrina have revealed inadequate capital and pricing models in the insurance industry. The industry needs to look ahead when planning, instead of relying on historical data, Lloyd’s states.
"Although it has been almost two decades since the U.N. recognized that climate change was a catastrophic threat to the Earth, it’s clear that the insurance industry has not taken catastrophe trends seriously enough," said Rolf Tolle, Lloyd’s director of franchise performance. "As an industry, we must work together to understand and manage these new risks and to change our behavior."
The report, released in May, was the launch of Lloyd’s 360 Risk Project, designed to generate debate among insurers about risk issues and how to manage them.
Executives with West Bend Mutual Insurance Co. have been paying attention to global climate change. Rick Fox, vice president and chief actuary with the insurer, said he read the Lloyd’s report, and its facts have echoed his own concerns.
"The message from Lloyd’s is, ‘There is a lot of evidence to believe that climate change is going on, and humans are influencing that. The risk as insurers and re-insurers may not be what you think it is, and the past may not be what the future is. This is riskier than you think,’" Fox said.
As a result, West Bend Mutual is more pessimistic, at its margins, about insuring for weather losses than in the past. Averages from the past 10 to 40 years cannot be relied upon as much, Fox said, and newer models haven’t been developed. However, it remains difficult for the company, and any insurer, to accurately account for potential weather damage today.
"It’s so tough, when climate modelers talk about the next 100 years, how does that factor into next year?" Fox said.
Other smaller regional insurers such as Germantown Mutual Insurance Co. and Milwaukee-based Badger Mutual Insurance Co. aren’t taking global warming, climate change or the report issued by Lloyd’s of London into consideration.
"At this point, we’re aware of it," said Richard Smith, president of Germantown Mutual. "If we have a lot of storms this year, it will be talked about more. If not, and if there’s no damage, we won’t hear much about it."
Smith said the insurance industry talked about climate change in the late 1990s and early 2000s, when there were large storms in the winter months. But since 2001, those storms have settled down, as has much of the talk about climate change.
Roy Bubeck, president and chief executive officer of Badger Mutual, said because his company doesn’t insure on the coasts and only focuses on the Midwest, it isn’t worrying about global warming or climate change at this time.
"We have to be competitive in our market," he said. "We’re a little more concerned with a hail storm in Hartford than what global warming is doing to create more hail storms, and if that will have more impact. Our issues are a little more concrete than that."
For some of Wisconsin’s regional insurers, global climate change has started affecting the way they do business, not because Wisconsin’s climate is changing, but because other, national insurers are starting to change their practices.
Recent weather events are beginning to pit national insurance companies against non-coastal regional insurance companies, said Ben Salzmann, president and chief executive officer of Sheboygan-based Acuity.
"You’re an addicted national stock insurance company if you’re writing in California, Texas, Florida or New York," Salzmann said. "Those four states represent so much of the country that they can’t afford to leave. In California, you’re bludgeoned with earthquakes, fires and natural disasters. You’re getting clobbered. In Texas, you’ve got hurricanes and tornadoes. In Florida and New York, you’ve got hurricanes and Attorney General (Eliot) Spitzer that is crucifying insurance companies."
Recently, Allstate Insurance Co., a national insurer, took out a full page advertisement in The Wall Street Journal, calling for the establishment of a national pool that would help insurance companies cover massive losses from natural disasters. If such a pool were established, it would mean that customers in the Midwest and other non-coastal regions would help pay for losses on the coasts, he said.
"All they want to do is charge Wisconsin customers," Salzmann said. "The addicted national stocks are trying to share the cost of the national problem. They’re not looking for a cure. Allstate isn’t saying we need to re-evaluate how we build breakwaters or asking if we should rebuild New Orleans. All they’re trying to do is get the people in the Midwest to share in the cost."
Acuity does not cover areas that have been affected by recent large natural disasters, Salzmann said. Because of the high price tags for rebuilding from hurricane and earthquake damage, the company won’t be expanding into the coasts, he said.
If the United States is going to reduce its exposure to damage from extreme weather, it will need to reconsider where people are living, Salzmann said.
"You have homes on stilts, and the road is just off the water (in Florida)," he said. "The last set of hurricanes caused a building boom. When you go to the Keys or to Captiva, it blows you away, because you’ve never seen so much construction. You see gargantuan home after home, and the waves are almost washing up on them. And Allstate is saying, ‘I’ve got to help build this.’ People in California are saying they won’t live here, but they want us to help them pay for the costs (of rebuilding)."
Acuity and Salzmann have put updated materials together for their agents to prepare them for visiting areas outside the company’s coverage area.
"We want to be make sure they’re all grasping the game that’s being played here, so that when they go to Washington, D.C., their eyes are open, so that they can say, ‘Time out here, we don’t want you to turn the Midwest into a subsidy for the coasts,’" Salzmann said.
Unlike the coasts, where many insurers are beginning to scale back coverage, the Midwest remains a highly desirable place to write policies, Salzmann said. In fact, while rates are steadily climbing on the coasts, insurance rates in the Midwest and Wisconsin are falling.
"The regionals aren’t feeling pressure from the nationals," he said. "If the Midwest didn’t have the regionals, we would be paying a lot more for insurance, because we’d be supplementing for national (policies)."
