Climate Change and the Reinsurance Implications (2024)

Climate change presents “high exposure risk” to insurers and their policyholders on many fronts:

General liability claims for third-party bodily injury and property damage, directors and officers claims for a company’s failure to properly disclose climate-related or failure to align its business model with a low-carbon future and first-party loss, including business interruption.

To date, there have been minimal coverage actions relating to climate change, but expect that to change given the increasing number of underlying lawsuits and related activity, “coupled with the staggering liability that is at stake.

That’s all according to a white paper, Climate Change and the (RE)Insurance Implications, released on Wednesday.

The paper, coauthored by Traub Lieberman Straus & Shrewsberry LLP and Aspen Re, examines the insurance issues surrounding climate change, including the science, data, litigation, cost and examples of international and national action and insurance implications.

Visit Insurance Journal’s Research & Trends Section to read the full report.

The litigation landscape has been changing, which in turn has implications for the reinsurance industry, especially those transacting commercial general liability, D&O and property business. And reinsurers as investors must appraise their investment strategy, including fossil fuel and renewable energy companies, to help mitigate the projected impact of climate change, according to the paper.

The paper notes that 2017 was the costliest year on record for natural catastrophe events, with $344 billion in global economic loss, of which 97 percent was due to weather-related events, while insured loss estimates from natural catastrophes totaled $140 billion in 2017.

A 2018 report from the Intergovernmental Panel on Climate Change estimated that global economic damages by 2100 would reach $54 trillion with a 1.5-degrees Celsius of warming of the planet, $69 trillion with 2 degrees Celsius of warming and $551 trillion with 3.7 degrees Celsius of warming.

Some bullet points from the report include:

• Climate litigation is increasing and reflects advancements in science and economic modelling, discovery of corporations climate knowledge, public involvement and a more collaborative approach of cities, experts and the legal community. There has been a dearth of coverage actions and decisional law relating to insurance for climate change liability is virtually non-existent – but that will likely change soon, given the rising prominence of the issue, the substantial costs involved and the increased litigation activity by municipalities and private parties against fossil fuel companies and other target defendants.
• The world’s leading insurance companies have made some progress in setting climate strategy, targets and risk management in place, although those in the U.S. are lagging those in Europe and Japan. Both the asset and the liability side of the balance sheet are vulnerable and insurers have played a part in divestment from the fossil fuel industry and this is expected to continue.
• Climate change implications include potential credit rating downgrades for coastal municipalities given sea level projections and possible rapid escalation of flood insurance premiums, given the current indebtedness of National Flood Insurance Program and the strong push for significant legislative reform, including accounting for specific flood risks associated with the location and structural characteristics of the property, rather than much more general underwriting criteria currently in use.

Financial Regulator

A top regulator recently compared the financial risks from climate change to the devastation of the mortgage meltdown that triggered the 2008 financial crisis.

Rostin Behnam, who sits on the Commodity Futures Trading Commission, aired his concerns about climate change in a New York Times story on Tuesday.

“If climate change causes more volatile frequent and extreme weather events, you’re going to have a scenario where these large providers of financial products — mortgages, home insurance, pensions — cannot shift risk away from their portfolios,” he said in the NY Times article. “It’s abundantly clear that climate change poses financial risk to the stability of the financial system.”

Behnam is a Democrat who was appointed by President Trump.

The commission consists of five commissioners appointed by the President for five-year terms. No more than three commissioners at a time may be from the same political party.

Behnam’s stance is definitely not the stance of Trump, who has the U.S. prepared to withdraw from the Paris climate accord.

Behnam told the NY Times that his interest in climate change’s impact on the financial world stems from six years working for Debbie Stabenow, a Michigan Democrat, on the Senate Agriculture Committee.

Behnam plans to eventually form a panel of experts at the commission who will produce a report on how global warming could affect the financial sector, potentially impacting food costs, insurance markets, the mortgage industry and other economic pillars, according to the article.

Violent Conflicts

Climate change will intensify violent conflicts, according to a Stanford University study published on Wednesday in the Journal Nature.

Estimates in the study show climate has influenced between 3 percent and 20 percent of armed conflict risk over the last century – and things could get worse.

“Intensifying climate change is estimated to increase future risks of conflict,” the study states.

Climate change’s influence on conflicts would more than double (a 13 percent chance) with 2 degrees Celsius of warming, while its influence on conflicts would increase to 26 percent chance with 4 degrees of warming, according to the study.

How so?

Extreme weather driven by climate change, along with related disasters, can hurt economies, and impact farming and livestock production – thereby intensifying social inequality – and all of this can lead to an increased risk of violence, according to the study.

The researchers acknowledged they don’t fully understand how and under what conditions climate affects conflict, and that “other drivers, such as low socioeconomic development and low capabilities of the state, are judged to be substantially more influential, and the mechanisms of climate-conflict linkages remain a key uncertainty.”

Rain, Rain

“Record Rain Is Drowning Fields in the Midwest — Is It Climate Change?”

That’s the question posed in a blog in Discover posted this week, which notes the past 12 months in the U.S. have been the wettest on record, according to National Oceanic and Atmospheric Administration measurements dating back to 1895.

“If things don’t dry out soon, some farmers may miss their planting window entirely and will have to wait until next year to plant a crop,” the story states, adding that it’s too soon to say if this year’s crop and flood damages can be attributed to climate change, but “predictions for a warmer future have these areas slated for more of these extreme rainfall events.”

The rain has kept farm equipment out of the fields, and had made it difficult to plant seeds.

By the time June rolls around, 96 percent of the U.S. corn crop has typically been planted. As of this week, 83 percent of those crops were planted, putting farmers far behind schedule, according to the U.S. Department of Agriculture.

“A soggy start to the corn season could mean less corn later this year,” the article states. “Consumers won’t see much of an increase when it comes to corn at the supermarket, but meat and dairy farms are likely to feel the pinch as feed prices rise. It takes a lot more corn to make a hamburger than it does to make a box of corn flakes, so prices will rise accordingly.”

Past columns:

• IBHS Chief Wright Urges Congress to Consider Tax Credits for Climate Resilience
• California’s New Climate and Sustainability Chief in Talks with Insurers
• House Passes Climate Now Act, But What’s The Next Step?
• California Commissioner Yet to Move on Petition from Climate Activists for More Insurer Regs

Topics USA Flood Reinsurance Agribusiness Climate Change