Climate Change Risks: How the E&S Market Is Closing the Natural Disaster Coverage Gap

By: | October 14, 2022

Erich Bublitz is the Senior Vice President of AmTrust’s Excess and Surplus (E&S) division. He leads the AmTrust E&S team in supporting a unified national underwriting appetite focusing on specific industry segments while continuing AmTrust’s dedicated wholesale distribution strategy. AmTrust E&S offers clients a wide range of specialty insurance products through its three primary underwriting platforms: Specialty Primary and Supported Excess, Unsupported Excess, and Contract Binding.

Every day, there are news stories about severe weather-related events around the globe. In 2021 alone, there were wildfires across the U.S., the third-most active Atlantic hurricane season on record and the winter storm that hit Texas and other southern states. In 2022, add flooding and extreme temperatures to the severe weather mix.

According to the National Oceanic and Atmospheric Administration (NOAA), there were 20 separate billion-dollar climate or weather-related disasters in 2021, with damages totaling $145 billion.

The three costliest events were Hurricane Ida, the mid-February winter storm/cold wave in the southeast and the western wildfires.

NOAA explains that the number of weather and climate disasters is rising due to greater exposure and vulnerability and the accelerating rate of climate change. Global temperatures are predicted to continue to rise due to human-caused greenhouse gas emissions, triggering more extreme weather events worldwide.

A recent Deloitte survey found that more than half of U.S. state insurance regulators surveyed thought that climate change was likely to have a high impact or extremely high impact on coverage availability and underwriting assumptions. Insurers can no longer avoid thinking about the effects of the changing climate on their underwriting, rates and investment decisions.

Climate Change Impact on the Insurance Industry

The insurance market has hardened over the past few years due to many factors, including social inflation, nuclear verdicts, increasing cyber exposure, inflation, extreme weather conditions and supply chain issues caused by the COVID-19 pandemic. Insurers are now more cautious with potentially unpredictable insurance coverage and challenging business classes.

P&C insurers offer coverage to structures, property and belongings that could be damaged or destroyed for various reasons. However, over the past few decades, climate change has caused droughts and intensified wildfires and severe weather such as heavy rain, hurricanes, tornadoes and floods. Natural disasters like these can destroy homes and businesses, increasing extreme weather damage claims.

While carriers are understandably averse to traditional catastrophic property coverage, climate change has created new potential for catastrophic losses. While these types of losses have historically been able to be modeled, climate change is creating catastrophic exposures beyond these models.

The obvious catastrophic exposures — such as coastal and wildfire-prone properties — continue to be difficult for underwriters to write. Through increased drought, freezes and tornadoes, these exposures are spreading to areas of the country that previously have not been exposed to such risks.

The impacts of climate change are also making it more important than ever that insureds are properly valuing their property. With climate change increasing the possibility for catastrophic losses in areas where these losses weren’t common, the failure to accurately value property can result in coinsurance penalties being applied.

Insurance property policies differ based on location and need. Common coverages found in most property and casualty policies should protect against losses due to catastrophic weather events. Some potential insurance-related legal issues could include:

  • Multiple perils, such as separate wind or water damage, that combine to cause losses
  • Multiple occurrences of a weather event, such as three landfalls from the same hurricane
  • Commercial property policies with different deductibles for different types of risks

Climate change and the increase in the frequency of severe weather-related events have forced the insurance industry to rethink how it approaches specific coverages, develops new products and revisits underwriting considerations and pricing to help meet climate-related challenges and risks.

Insurance companies must be careful not to underestimate the potential threats of climate change on local economies, small businesses and consumers. The increase in extreme weather events can threaten company business models and make insuring risk unaffordable for small business owners and unfeasible for insurers.

Data analytics and macroeconomic implications can help traditional property and casualty insurers predict how some climate hazards could affect them and their coverages over time.

E&S Market Sees Opportunities in Climate Change-Related Risks

The excess and surplus (E&S) market is one of the fastest-growing sectors in the insurance industry.

The E&S market is robust, flexible and creative enough to have effective insurance solutions for the most challenging risks, such as the risks that come from the impact of climate change. E&S brokers and insurers understand unique and complex exposures and can, in most cases, provide customized coverage not available in the standard market to meet their clients’ needs.

Some traditional insurers have stopped covering climate change-related risks in some parts of the country, opening these opportunities to the E&S market. With their dedicated claims and underwriting teams, E&S and specialty lines are well-suited to take on the evolving risks that certain insurance carriers are cutting back on.

By identifying emerging patterns, claims histories and risk management, E&S underwriters can more accurately assess risk, take a more holistic approach to the risk and its likely impact, and price their policies accordingly. E&S teams require a deeper understanding of the nature of the claim, especially concerning extreme weather events due to climate change, how they occurred and what mitigation efforts can help reduce the chances of a similar claim in the future.

Protecting the Future with Risk Management Today                  

With the recently signed Inflation Reduction Act, President Biden has vowed to take on some of the climate change issues to help protect the environment in the U.S. for the future. Insurers, brokers and wholesalers will need to continue to partner with their clients to help mitigate weather-related challenges and reduce the ever-changing climate risks.

E&S brokers and carriers can work with their partners to ensure their organizations have the appropriate risk management programs in place, and support their customers’ needs to protect themselves from climate change-caused weather risks. &

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