Climate Change: Risks and Opportunities for the Insurance Industry. Nancy D. Israel, Ceres CANE Fall Meeting September 20, 2013

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1 Climate Change: Risks and Opportunities for the Insurance Industry Nancy D. Israel, Ceres CANE Fall Meeting September 20,

2 Topics Introduction of Ceres Climate Change is a Current Risk Plan for a Future of Extreme Weather Regulators Are Focused on Climate Risk P&C Insurers and Climate Change Climate Change is Economic Opportunity Resources 1

3 Ceres mobilizes business and investor leadership to build a thriving, sustainable global economy Investor Network 101 members currently representing more than $12 trillion AUM The Ceres Coalition More than 130 organizations including environmental experts, public interest groups, and investors. Company Network More than 75 members in more than 20 sectors

4 Topics Introduction of Ceres Climate Change is a Current Risk Plan for a Future of Extreme Weather Regulators Are Focused on Climate Risk P&C Insurers and Climate Change Climate Change is Economic Opportunity Resources 3

5 Source: Joel Pett, USA Today 4

6 Insured weather catastrophe losses have increased in size and frequency over the past two decades Insured Catastrophe Losses, Source: Swiss Re, Sigma Natural and Manmade Catastrophes

7 U.S. Natural Catastrophes, Overall and Insured Losses, US$B 2012 experienced the second highest overall losses in over 30 years (constant dollars) Continues the trend of increasing costs of natural catastrophes Source: MunichRe NATCAT Service 6

8 Extreme Weather Nationwide Losses from Extreme Weather Disasters, (Loss figures are estimated economic losses unless otherwise noted) Source: Ceres based on public data 7

9 No Area of U.S. Is Immune from Extreme Weather 15% of U.S. population was affected by Sandy 80% of land mass of contiguous U.S. was affected by 2012 drought 33% of U.S. population had 100 temperatures for 10 days or more in extreme weather events across U.S. in 2012 caused over $1 billion in damage each Sources: Insurance Information Institute, NOAA, Congressional Research Service 8

10 Topics Introduction of Ceres Climate Change is a Current Risk Plan for a Future of Extreme Weather Regulators Are Focused on Climate Risk P&C Insurers and Climate Change Climate Change is Economic Opportunity Resources 9

11 Insurance equity analysts see increasing natural disasters as a top risk to insurers Source: Accenture Insurance Equity Analysts Survey,

12 AIR Worldwide Recently Added Climate Risk to Cat Models Companies looking to make better business decisions and manage their catastrophe risk more effectively simply cannot rely on scarce historical loss data to project future losses. Case in point: if Hurricane Andrew were to recur today, it would cost insurers nearly $60 billion. Source: AIR Worldwide, About Catastrophe Modeling

13 Particular Concern: Coastal Property Exposures Are Increasing 16% of the total insured residential and commercial properties in the US are along the Gulf and Atlantic Coasts NYC is riskiest or 2d riskiest city in world for coastal property value at risk of flooding $2 trillion AIR projects that the value of insured coastal properties, currently $10 trillion, will double every 10 years Sources: Mark Fischetti, Storm of the Century *Every Two Years*, Scientific American, June 2013; AIR Worldwide, The Coastline at Risk: 2013 Update to the Estimated Insured Value of U.S. Coastal Properties

14 Coastal population is growing: 39% of U.S. lived on shoreline in 2010 Shoreline population projected to be 133 million by 2020 Image source: Shutterstock; Data source: ; Data source: NOAA, State of the Coast 13

15 Atlantic Coast is Hot Spot for Sea Level Rise Sea level along the Atlantic Coast from Massachusetts to North Carolina is rising 3 to 4 times faster than the global average Image from Sallenger, etal; Used in Northeastern U.S. Coast Is Hot Spot for Sea-Level Rise, Wynne Parry, LiveScience, June 25, 2012: Increasingly red circles indicated locations where increases in sea level have been largest from 1950 to Researchers found a 'hotspot' of increased rates of sea-level rise from north of Boston, Mass., south to Cape Hatteras, N.C.

16 Towns and cities face growing risks due to flooding from sea-level rise, storm surge, and intense precipitation Severe Impacts of Hurricane Sandy New York State 300,000+ buildings destroyed/damaged 19,729 flights cancelled 2 nuclear power plants down Stock Exchange closed 2 days New York Marathon cancelled Estimated cost to NY $40b New Jersey Severe damage to infrastructure, mass transit and highway systems On average, feet of beach lost along the coast 72,000 buildings in NJ impacted by the storm Estimated cost to NJ over $30b Source: Swiss Re 15

17 Topics Introduction of Ceres Climate Change is a Current Risk Plan for a Future of Extreme Weather Regulators Are Focused on Climate Risk P&C Insurers and Climate Change Climate Change is Economic Opportunity Resources 16

18 NAIC Climate Risk Disclosure Survey new states Connecticut and Minnesota Reporting threshold lowered to $100 million in direct written premiums Our decision to expand the survey to companies writing premiums in excess of $100 million will double the number of companies required to respond and will give insurance regulators, investors and policyholders a better picture of how insurers are responding to climate change. Quote from California Insurance Commissioner Dave Jones, July 17, 2013 Press Release 17

19 Financial Examiners Handbook 18

20 SEC Requiring More Disclosure Example: Berkshire Hathaway Clearly disclose the amount of total catastrophe losses recorded Separately disclose the amounts recorded for each significant individual catastrophe Indicate how you identify an individual catastrophe as being significant Separately discuss any significant prior period loss development Source: April 2, 2013 SEC Comment Letter to Berkshire-Hathaway, Inc. 19

21 Topics Introduction of Ceres Climate Change is a Current Risk Plan for a Future of Extreme Weather Regulators Are Focused on Climate Risk P&C Insurers and Climate Change Climate Change is Economic Opportunity Resources 20

22 Insurers are recognizing (cautiously) that climate change has major implications Global climate change is the top risk management issue of the moment. Joe Plumeri, Chairman and CEO, Willis Group Holdings The insurance industry continues to be tested as catastrophic weather events have recently become more common and more severe. A.M. Best Company Whether it s global warming/climate change, I think as an industry we have to assume this is a new normal and we ll run our business consistent with that. Liam McGee, CEO, The Hartford 21

23 Many insurance companies openly acknowledge climate change risks Longer-term natural catastrophe trends may be changing due to climate change, a phenomenon that has been associated with extreme weather events. Changing climate conditions across longer time scales may in the future increase the severity of certain natural catastrophe losses across various geographic regions. Changing climate conditions, whether due to an increase in average temperatures (global climate change) or other causes, may increase how often severe weather events and other natural disasters occur and how much insured damage they cause. Liability exposures related to climate change continue to evolve [We] regularly review emerging issues, such as changing climate conditions, to consider potential changes to modeling Seasonal weather variations or the impact of climate change may affect the severity and frequency of our losses. 22

24 Despite broad awareness of climate change threats, most insurers could be better prepared Ceres Scores of Companies from 2012 Climate Change Survey Maximum Score = 50 points Results from 2012 Climate Risk Disclosure Survey 23

25 Ceres Recommendations for Insurers Treat climate change as a corporate-wide strategic issue, affecting all functions, at all levels, and formalize this in a public corporate policy statement Evaluate and price risk exposure in the context of climate change. Support research on the influence of a warming climate on human systems, including forecasting of future catastrophe trends, disease pathways, population migration, infrastructure failure and adaptive responses Develop and use catastrophe models that anticipate the probable effects of climate change on extreme weather events Update insurance pricing and underwriting practices to reflect changes in risks Ensure that investment advisors and asset managers have established expertise on climate change risk assessment and management Provide transparent, useful disclosure 24

26 Ceres Recommendations for Insurance Regulators Continue to mandate annual, public disclosure to foster more active engagement by insurers on the issue of climate change Clarify disclosure expectations Build climate risk considerations into the financial oversight process Create more shared resources to help insurers analyze and respond to climate-related risks and opportunities, including investment risks and opportunities Investment Risks and Opportunities Correlated Risks Loss Modeling Health and Life Loss Potential Customer Resilience Engage with insurers, consumers and other policymakers to better understand the nature of climate change risks 25

27 Topics Introduction of Ceres Climate Change is a Current Risk Plan for a Future of Extreme Weather Regulators Are Focused on Climate Risk P&C Insurers and Climate Change Climate Change is Economic Opportunity Resources 26

28 Climate Change Opportunities for Insurers Expanded private flood insurance in the US?: Flood is definitely insurable (Swiss Re Head of Flood Risk) Innovative products: Pay-As-You-Drive Insurance (Allstate, State Farm, Progressive) Investments in resiliency: $1 spent for prevention saves $4 in disaster costs and costs of claims Sources: Webcast Transcript: The State of Flood Insurance in the U.S., Best s Review (Jens Melhorn); FEMA Press Release Number citing study by the Multihazard Mitigation Council of the National Institute of Building Sciences 27

29 You are the Experts What do you think? 28

30 Topics Introduction of Ceres Climate Change is a Current Risk Plan for a Future of Extreme Weather Regulators Are Focused on Climate Risk P&C Insurers and Climate Change Climate Change is Economic Opportunity Resources 29

31 Useful Ceres Resources Ceres, Stormy Future for U.S. Property/Casualty Insurers: The Growing Costs and Risks of Extreme Weather Events Ceres, Insurer Climate Risk Disclosure Survey Ceres, The 21 st Century Investor: Ceres Blueprint for Sustainable Investing, 30

32 Other Useful Resources NOAA National Climactic Data Center, Extreme Events, NOAA, Digital Coast MunichRe, NatCatService American Academy of Actuaries, Society of Actuaries, et al, Determining the Impact of Climate Change on Insurance Risk and the Global Community: Phase I Key Climate Indicators (November 2012) 31

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34 Thank You! Nancy D. Israel Ceres Senior Manager, Insurance Program 33