Climate Change

A Scorecard on Climate Resiliency

A new report helps insurers -- and regulators -- benchmark progress on climate change preparedness.
By: | January 9, 2017 • 4 min read

Since 2010, the National Association of Insurance Commissioners (NAIC) has administered a Climate Risk Disclosure Survey, an eight-item questionnaire that assesses insurers’ approach to and preparedness for climate change.

As weather-related losses continue a steady climb across the globe, some insurers have taken steps to ensure they and their clients are prepared for the risks.

In addition, regulators have an interest in insurers’ climate change resiliency as well, to ensure the marketplace remains stable and comprehensive products are available to companies at affordable prices.

Since 2014, regulators in a handful of states have required that carriers writing more than $100 million in premium take the climate risk survey.

The NAIC survey provides regulators with insight into insurers’ strategies, and helps insurance companies to benchmark their efforts against both themselves and their competitors.

“The top core theme we give the most weight to in our analysis is climate risk governance; are senior managers and corporate directors engaged on the issue? Are they being regularly briefed?” — Max Messervy, co-author, Ceres Insurer Climate Risk Disclosure Survey Report

Ceres in turn evaluates those responses to identify trends and track improvement over time, a practice it began in 2011.

“We systematically look at these responses and see from an industry-wide perspective who is doing what,” said Max Messervy, a co-author of Ceres’ most recent report, “Insurer Climate Risk Disclosure Survey Report & Scorecard: 2016 Findings and Recommendations.”

The survey questions cover areas ranging from investment decisions, risk mitigation efforts, financial solvency, emissions and carbon footprint, and how insurers engage consumers on the issue.

“The top core theme we give the most weight to in our analysis is climate risk governance; are senior managers and corporate directors engaged on the issue? Are they being regularly briefed?” Messervy said.

According to the Ceres report, 25 percent of property/casualty insurers earned a “high quality” rating, meaning they regularly involve their boards of directors in discussions of climate change and sustainability goals.

Diane Cantello, vice president, corporate sustainability, The Hartford

Diane Cantello, vice president, corporate sustainability, The Hartford

“Through numerous studies and our work, it’s been shown to be a good practice to have senior management leadership from the CEO level on down regularly engaging in these issues as they emerge and evaluating economic impact,” Messervy said.

The Hartford, one “high quality” insurer on climate change, created an environment committee to oversee the company’s sustainability strategy.

This committee briefs the board of directors once per year and the executive leadership team – a group of 18 senior managers – twice per year.

The Hartford’s CEO has also participated in White House roundtables on climate resilience.

“The Hartford is recognized regularly for our commitment to corporate sustainability,” said Diane Cantello, vice president of corporate sustainability. “Between 2007 and last year, the company’s energy-related greenhouse gases were reduced by 57 percent.”

Keeping Informed

Another trait shared by “high quality” insurers — those who received at least 75 points from Ceres on a 100-point scale — is their collaboration with the scientific community.

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It all starts with knowledge. Getting the most up-to-date information on climate change both from leading scientists and through internal research is key to understanding the exposure an insurer faces and providing guidance to clients.

Swiss Re, for example, has established itself as a front-runner in conducting climate change research and working with governments and international bodies to facilitate the discussion.

“We’ve provided studies to governments across the globe, helping them to understand the future impact of climate change and develop an adaptation strategy, which includes insurance components.” — Andreas Spiegel, head group sustainability risk, Swiss Re.

“We have developed methodologies to assess and quantify climate risk for certain regions or certain clients; we’ve provided studies to governments across the globe, helping them to understand the future impact of climate change and develop an adaptation strategy, which includes insurance components,” said Andreas Spiegel, head group sustainability risk, Swiss Re.

FM Global, another high-scoring carrier, depends on its in-house engineering staff to evaluate the environmental impact of a variety of risks.

“We have to make sure we give our insureds sound guidance on how they can meet sustainability goals, which means advising them on how their risks can make them less sustainable, but also how their sustainability efforts present new risks in themselves,” said Lou Gritzo, vice president and manager of research, FM Global.

Take a somewhat standard property risk like fire. Gritzo said it is the insurer’s job to advise a client of the environmental impact of a potential fire, including air emissions, runoff from fire hosed, the disposal of burned material, and the effects of rebuilding any damaged structures.

Likewise, if a client decides to go green by installing rooftop solar panels, they should understand the risks that accompany the new equipment.

For its part, The Hartford developed insurance products to help customers reduce greenhouse gas emissions in 2009, and has more recently offered premium discounts to those who opt for electric or hybrid vehicles.

Gritzo said a key challenge for all insurers going forward will be keeping up with advancing climate change science and relaying that information in easily digestible ways to their clients.

New Business Potential

Adapting to climate change also means taking advantage of new business opportunities in renewable energy. Investment portfolios can provide insight into where those opportunities lie, and should therefore get a regular once-over from company leaders.

Fossil fuel producers, for example, counteract sustainability goals and will see performance decline as renewable energy producers move into the energy market and regulations to curb carbon dioxide emissions reduce demand for fossil fuels.

“We’re undergoing a massive energy transition currently, based on the Paris climate agreement signed in December 2015, and basically the economics of renewable energy are becoming increasingly favorable over fossil fuel-based energy,” Messervy said.

“There is a need to understand both the risk and the business opportunity in renewable energy. It’s a core interest for the insurance sector, especially reinsurance because macro risks are where we specialize,” Spiegel said.

Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

2017 RIMS

RIMS Conference Opens in Birthplace of Insurance in US

Carriers continue their vital role of helping insureds mitigate risks and promote safety.
By: | April 21, 2017 • 4 min read

As RIMS begins its annual conference in Philadelphia, it’s worth remembering that the City of Brotherly Love is not just the birthplace of liberty, but it is the birthplace of insurance in the United States as well.

In 1751, Benjamin Franklin and members of Philadelphia’s first volunteer fire brigade conceived of an insurance company, eventually named The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire.

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For the first time in America — but certainly not for the last time – insurers became instrumental in protecting businesses by requiring safety inspections before agreeing to issue policies.

“That included fire brigades and the knowledge that a brick house was less susceptible to fire than a wood house,” said Martin Frappolli, director of knowledge resources at The Institutes.

It also included good hygiene habits, such as not placing oily rags next to a furnace and having a trap door to the roof to help the fire brigade fight roof and chimney blazes.

Businesses with high risk of fire, such as apothecary shops and brewers, were either denied policies or insured at significantly higher rates, according to the Independence Hall Association.

Robert Hartwig, co-director, Center of Risk and Uncertainty Management at the Darla Moore School of Business, University of South Carolina

Before that, fire was generally “not considered an insurable risk because it was so common and so destructive,” Frappolli said.

“Over the years, we have developed a lot of really good hygiene habits regarding the risk of fire and a lot of those were prompted by the insurance considerations,” he said. “There are parallels in a lot of other areas.”

Insurance companies were instrumental in the creation of Underwriters Laboratories (UL), which helps create standards for electrical devices, and the Insurance Institute for Highway Safety, which works to improve the safety of vehicles and highways, said Robert Hartwig, co-director, Center of Risk and Uncertainty Management at the Darla Moore School of Business at the University of South Carolina and former president of the Insurance Information Institute.

Insurers have also been active through the years in strengthening building codes and promoting wiser land use and zoning rules, he said.

When shipping was the predominant mode of commercial transport, insurers were active in ports, making sure vessels were seaworthy, captains were experienced and cargoes were stored safety, particularly since it was the common, but hazardous, practice to transport oil in barrels, Hartwig said.

Some underwriters refused to insure ships that carried oil, he said.

When commercial enterprises engaged in hazardous activities and were charged more for insurance, “insurers were sending a message about risk,” he said.

In the industrial area, the common risk of boiler and machinery explosions led insurers to insist on inspections. “The idea was to prevent an accident from occurring,” Hartwig said. Insurers of the day – and some like FM Global and Hartford Steam Boiler continue to exist today — “took a very active and early role in prevention and risk management.”

Whenever insurance gets involved in business, the emphasis on safety, loss control and risk mitigation takes on a higher priority, Frappolli said.

“It’s a really good example of how consideration for insurance has driven the nature of what needs to be insured and leads to better and safer habits,” he said.

Workers’ compensation insurance prompted the same response, he said. When workers’ compensation laws were passed in the early 1900s, employee injuries were frequent and costly, especially in factories and for other physical types of work.

Because insurers wanted to reduce losses and employers wanted reduced insurance premiums, safety procedures were introduced.

“Employers knew insurance would cost a lot more if they didn’t do the things necessary to reduce employee injury,” Frappolli said.

Martin J. Frappolli, senior director of knowledge resources, The Institutes

Cyber risk, he said, is another example where insurance companies are helping employers reduce their risk of loss by increasing cyber hygiene.

Cyber risk is immature now, Frappolli said, but it’s similar in some ways to boiler and machinery explosions. “That was once horribly damaging, unpredictable and expensive,” he said. “With prompting from risk management and insurance, people were educated about it and learned how to mitigate that risk.

“Insurance is just one tool in the toolbox. A true risk manager appreciates and cares about mitigating the risk and not just securing a lower insurance rate.

“Someone looking at managing risk for the long term will take a longer view, and as a byproduct, that will lead to lower insurance rates.”

Whenever technology has evolved, Hartwig said, insurance has been instrumental in increasing safety, whether it was when railroads eclipsed sailing ships for commerce, or when trucking and aviation took precedence.

The risks of terrorism and cyber attacks have led insurance companies and brokers to partner with outside companies with expertise in prevention and reduction of potential losses, he said. That knowledge is transmitted to insureds, who are provided insurance coverage that results in financial resources even when the risk management methods fail to prevent a cyber attack.

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This year’s RIMS Conference in Philadelphia shares with risk managers much of the knowledge that has been developed on so many critical exposures. Interestingly enough, the opening reception is at The Franklin Institute, which celebrates some of Ben Franklin’s innovations.

But in-depth sessions on a variety of industry sectors as well as presentations on emerging risks, cyber risk management, risk finance, technology and claims management, as well as other issues of concern help risk managers prepare their organizations to face continuing disruption, and take advantage of successful mitigation techniques.

“This is just the next iteration of the insurance world,” Hartwig said. “The insurance industry constantly reinvents itself. It is always on the cutting edge of insuring new and different risks and that will never change.” &

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]