Climate Change and Insurance...Are We Headed in the Wrong Direction?

Photo by GRACELINKS on flickr

If, like me, you tend to get glued to your TV or computer screen when extreme weather strikes, then you know that 2011 was a very active year with respect to natural disasters. 2011 has distinguished itself as the third most active year on record for hurricanes, and set the record on billion dollar weather disasters in the United States.

Climate scientists warn us that with increasing global temperatures wet places will get wetter, dry places will get drier and storms could get much more intense. This translates into more droughts, wildfires, floods, hurricanes and tornadoes. Good times. Science skeptics aside, there’s no denying that lately we've been experiencing that increased intensity.

The year was filled with headlines about “historic snow packs,” “record-setting high temperatures” and “historic droughts.” In news report after news report, someone affected by a recent wildfire or flood was quoted as saying, “I've never seen it like this before.” As early as June, NOAA scientists were calling 2011 “one of the most extreme years on record.”

In the 1990s, there was an average 46 federal disasters declared annually; last year, there were 81 ; this year there were 98.

According to the National Academy of Sciences, “Climate change is occurring, is very likely caused primarily by the emission of greenhouse gases from human activities, and poses significant risks for a range of human and natural systems.” According to Climate Communication, “All weather events are now influenced by climate change because all weather now develops in a different environment than before...climate change has shifted the odds and changed the natural limits, making certain types of extreme weather more frequent and more intense.”

One entity that is particularly impacted by all the crazy weather (and the lack of future predictability) is the insurance industry, and you'd better believe the industry is embracing the concept of climate change. Check out this Market Watch story to see a sampling of quotes about climate change from major insurance companies. They are all reading the (scientific) writing on the wall and drawing the same conclusions: climate change is not a hoax, it’s real and it’s going to cost everyone a lot of money.

A March 2008 study by Ernst & Young lists climate change as the number one risk to the insurance industry, describing climate change as “long-term, far-reaching and with significant impact on the industry.” So, how does the industry interpret “significant impact”? According to Peter Hoppe, head of Munich Re’s corporate climate center, “If we [the industry] know the risk, then climate change is no problem for our business model.” By “no problem” they, of course, mean that they will be passing that risk on to customers in the form of raised rates, exclusions on coverage or outright denial of coverage.

Take Alabama, a state ravaged by devastating tornadoes last spring. Rates have risen in the state by as much as eight or nine percent this year; however, those rates were already on the rise before the April 27 tornado outbreak that devastated Montgomery. That’s because home insurance rates aren’t set to recoup losses from damage caused by current disasters but are set to cover predicted future losses, and the models that incorporate climate change are predicting big increases in future losses.

A 2007 Environmental Defense Fund report found that, after Hurricane Katrina, homeowners insurance rates increased nationally between 20-100 percent. In some states rates doubled, tripled or more. In Florida, the situation has been labeled “The Insurance Crisis” and the state legislature now regularly considers measures that would produce a friendlier business climate for insurance companies (of course, making it more expensive and exclusive for property owners). Yikes!

Recent weather-related natural disasters have driven home the point that insurance companies don’t cover flood damage. Homeowners seeking flood insurance must turn to the National Flood Insurance Program, part of the Federal Emergency Management Agency (FEMA), for flood insurance. In order to qualify for this insurance you have to live in a flood zone in a community that participates in the program.

While this may seem like a sure bet for coverage in flood-related disasters, FEMA constantly juggles the needs of past and current disasters and the funding isn’t always there. This past year, a budget shortfall threatened to shut down disaster recovery projects in numerous states throughout the country. This will become increasingly troublesome as people who live in flood-prone areas face continual flood threats and turn to the government to bail them out, and especially when people brazenly tempt the fates by building homes in areas that are almost sure to flood (Dakota Dunes, anyone?).

Unfortunately, the insurance industry is finding new ways to manage their business model by widening exclusions. Some companies have stopped covering mold damage because of the explosive growth in this type of damage. Guess what increased precipitation and humidity brings with it? That’s right – increased mold damage.

Insurance companies have also started excluding coverage for damage from windstorms, and by “windstorms” they mean hurricanes, tornadoes and hailstorms (and how many of us don’t live in an area prone to windstorms?). If you live in large swaths of the United States you may find yourself having to purchase separate windstorm coverage that could more than double the cost of homeowners insurance. I think they call that a “gotcha.”

Some insurance companies have stopped providing coverage altogether in areas most affected by climate change. In 2007 Allstate said that climate change had prompted it to cancel or not renew policies in many Gulf Coast states. Soon after, State Farm and Farmer’s followed suit, and now some coverage is denied or limited even in the mid-Atlantic and northeastern states (who knew Vermont could get hurricane damage?).

Time to rethink buying that cute little beach bungalow.

Whether or not you believe in climate change doesn’t really matter where insurance is concerned because insurance companies sure do believe, and that belief could impact your ability to insure your investment. You buy insurance to protect against disasters that could threaten your investment. Insurance companies write policies that are, in the long run, designed to make them money. It’s idealistic to think that they are there through thick and thin – like a good neighbor! – but ultimately, companies don’t think twice about passing the costs of climate change on to you, or if you become too much of a risk, dropping you altogether. As you buy a new home or look for new coverage, these are just a few of the things you'll need to consider.

Just a little something to ponder as you watch the 24/7 disaster news feed and contemplate your own risk.