The Business of Risk – Insuring Against Climate Change

When it comes to assessing risk, the insurance industry is one of the leaders in the field. Whether it is health insurance, car insurance, or homeowner’s insurance, the industry is forced to analyze every possible scenario for a given person or structure, and impose a fee based on the likelihood of events for the situation. So when an entire industry that bases their profitability on reducing risk starts factoring climate change into their equations, it's probably a good idea to pay attention.

Earlier this month, insurance commissioners in three separate U.S. states began mandating that insurance providers include the risk of climate change disasters in their risk equations, and develop and disclose their plans to deal with climate-related catastrophes. These plans will be laid out in surveys that insurance companies will provide to insurance commissioners in their respective states.

The three states that have made these new rules are California, New York, and Washington State. Previously, many states had only required the largest insurance companies to have climate plans, but the new rules, which could spread across the United States to climate change-vulnerable places like Florida and Texas, require all insurers to adjust for climate change disasters.

The New York Times lays out why the industry is taking on climate change issues:

Last year’s level of natural disasters was unprecedented, according to an August report by the A. M. Best Company, which rates the financial strength of insurers. By late June, the estimated $27 billion in losses suffered by the American industry exceeded the 2010 total.

Many insurance companies, particularly large international reinsurance firms, have been grappling with the issue of assessing risks that are not reflected in the historical record of insurance payouts…

Roughly 25 percent of the industry’s large property, casualty and life insurance companies participated in an earlier version of the survey sent out by California and five other states last year. A rule change, combined with California’s partnership with New York and Washington, will mean that 300 of the larger insurers will have to comply. Companies that do not complete the survey could face fines, although it is highly unusual for companies to ignore such directives.

Acceptance of climate change is nothing new for the insurance industry. Many larger insurance providers have been factoring climate change into their risk analysis for years, making the industry an unlikely ally in the battle against climate change, if for no other reason than protecting their bottom line. After all, estimates show that the industry could lose billions, or even trillions, of dollars due to climate change-related events, especially in large areas like New York City.

Several years ago, an industry-wide survey identified climate change and climate-related disasters as the number one risk to the industry in the coming years.

Given the industry’s acceptance of climate change, you would think they would support all efforts to curb the impact that human beings are having on the climate. After all, unlike the energy industry (and the Republican Party) that claims that acting on climate change is too costly, for the insurance industry, taking no action will cost them dearly.

Unfortunately, the industry continues to pour most of their political dollars into the pockets of Republicans who are attempting to dismantle current environmental protections, and who have outright denied the existence of anthropogenic climate change. According to Open Secrets, over the last 20 years, the industry as a whole has given more money to Republicans than Democrats in every election cycle (including this year’s national elections.)

The top individual recipient this year has been Texas governor Rick Perry, who not only lives in a state that has been battered with extreme droughts and hurricanes, but he is also a noted climate change denier.

Furthermore, the industry’s support of the Republican Party shows that they are putting ideology over their own well-being. Republican voters, especially those who consider themselves members of the Tea Party movement, are more likely than both independents and Democrats to deny the existence of climate change, or the fact that climate change is being caused by human activities.

Top executives, along with industry shareholders, understand the risks that climate change poses to the insurance industry, and yet they are still directing their dollars to political parties and candidates that refuse to take action on the issue of climate change. And every time that a company has to pay out billions of dollars for a climate change-related disaster, it will only prove that they are putting partisan politics above the livelihoods of their clients.

Image credit – OutOfTheStormNews.


Climate change will create more extreme events, more people will make claims, insurance premiums will rise. It seems that deniers don’t take into account all the associated costs of climate change.

Its elementary my dear Watson.