Insurers keen to help manage climate risks
Insurers and reinsurers may not be able to stop climate change, but they can take a role in reducing its effects and helping people recover when catastrophes happen.
Ways they can do so include incentivising property owners to make wiser choices about how and where they build a home, explaining the value of insurance, and by swiftly paying out claims to help individuals and communities recover.
Those were among the messages shared by an insurance industry-focused panel at the first Bermuda Climate Risk Forum.
“Insurance and reinsurance should be at the forefront helping to manage the risk associated with a changing climate,” Andrew MacFarlane, Axa XL’s managing director and head of pricing and analytics of London and Bermuda reinsurance, said.
“We are not necessarily going to stop the changing climate, but we can certainly mitigate some of the impact that we will see.”
Hurricanes and wildfires in California were key perils discussed by the panel.
Also mentioned was Hurricane Andrew, which struck Florida in 1992. It was cited as an example of a devastating extreme weather event, and one which was a catalyst for the emergence of Bermuda as a centre for catastrophe insurance and reinsurance.
Lara Mowery, head of global property practice at Guy Carpenter, said: “A lot of what Bermuda is now, grew out of the crisis of Hurricane Andrew.”
At the time, the state of Florida had no idea how it was going to get back on its feet, economically, politically and environmentally, she said. Then Bermuda came to the fore responding to the catastrophe through its insurance and reinsurance sector.
Jeffrey Manson, senior vice-president, public-private partnerships and protection gap initiatives, at RenaissanceRe, said: “Andrew was a shock-loss to the industry; up to 1992 people thought the biggest event that could ever hit Florida was a $10 billion event, and it [Andrew] was a $25 billion event.
“That just blew people’s minds, like, how could this happen? But it does, and that will continue to happen.”
A risk study found the top three concerns in 2009 were all economic-based, while this year the top three are all weather or climate change-related.
Wildfires and hurricanes have always been part of the natural environment, but their severity and impact on people and property is now greater.
Mr MacFarlane said there is a lot of talk around the southern California wildfires of people building in places that are not suitable from a fire-peril perspective.
He said that as populations expand and the demand for housing increases, more building is taking place in areas prone to the worst effects of hurricanes and wildfires.
“Wildfires are part of the natural environment, and it is a peril that the ecosystem requires,” he said.
“In Florida, we see more and more houses being built in areas that are exposed to rising sea levels and tropical cyclones.”
Roy Wright, president and chief executive officer of Insurance Institute for Business and Home Safety, referring to wildfires, said: “From a climate cycle perspective, we are seeing the raining season in California shrink.
“Not the average amount of rainfall, but the rainy season that used to start in November and went through April, is now starting around Christmas and wrapping up in February. So these catastrophic events are happening in October through to December.”
He said growth and where people have built homes “are on a collision course with a climate reality that is exacerbating the problem”.
Mr Wright also spoke about the effect of “long-duration mid-intensity” events, such as tropical storms and hurricanes that bring prolonged adverse conditions and can create damage 50 to 100 miles inland.
He said people affected by these may have previously considered rising sea levels not to be of concern to them given the distance they live from the coast, “but they are now finding the broader impact of climate variability affecting their home”.
Ms Mowery said it was going to be critical to impact consumer behaviour and decision-making.
She said if an insurance company knows and understands that certain characteristics about how and where a house is built, and the choice of landscape surrounding it, has a measurable impact on the amount of loss risk it might face in the future, it should reflect that in the insurance pricing. She believed that might lead to smarter choices by home and property owners.
“Will consumers on their own make the right decision to build their house the right way?
“People respond to financial incentives. If an insurance company can say to them their premium is going to be 20 per cent less if you do these things, that is going to drive behaviour changes.”
As for the importance of insurance, Mr MacFarlane said it allows people to bounce back after an event, and he believes the industry needs to do a better job at articulating the importance of that.
“Without insurance and reinsurance, economies would not be able to function the way they do,” he said.
Adding to that, Mr Wright highlighted the importance of quickly mending the damage caused by a natural catastrophe. He said: “Your ability to pay and restart an economy is so important. Liquidity is so vital.
“When reinsurers say the money is going to be there — it’s there. No one is squabbling. It provides for governments and local governments to be able to put those resources into motion.”
John Huff, president and CEO of the Association of Bermuda Insurers and Reinsurers, said: “This is the calling card of Bermuda, being able to have that liquidity and the timeliness of that liquidity.”
He said he had personal experience of that when, as a state regulator in the US and following the state’s largest insured event, he knew the Bermuda market was sending money right after the event.
“I don’t mean weeks after the event, I mean hours after it,” he said, explaining that such liquidity is important to jump-start the rebuilding process.
“The first thing is clearing away the debris, because people have to see a vision and rebuilding. Once the debris is gone, you have to see that money starting to spin.”
The panel discussion was moderated by Ariane West, director of structured finance at Nephila Climate. The one-day Bermuda Climate Risk Forum was held at the Hamilton Princess & Beach Club.
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