Insurance is a little mysterious to most people. The risk assessment, the loss projections, rate-setting and reinsurance woes — there are days when it looks as if the industry is working off a Ouija board. “Will there be a hurricane in Florida?” The planchette, under the deft fingers of a group of insurance executives, moves to “yes.” “Will there be much property damage?” The planchette moves to a Y, then a U and, finally, a P. “Yup.”
“There we have it, ladies and gentlemen,” says the leader. “Our model predicts at least one storm with a great deal of property damage. That translates into a 30 percent rate increase in the coastal areas.”
It’s easy to be flippant, of course, but the predictions have been over the top this year — yet, we’re more than halfway through the hurricane season, and we’ve done fairly well. (Knock wood.)
In our last post, we were talking about climate change and insurers’ adoption of climate change assumptions in rate-making. A recent survey of insurers showed that most companies agree that climate change will likely influence insurable perils. Still, hardly any insurance companies have incorporated climate change into their risk management programs.
If it were a factor, the researchers said, insurers would start looking beyond the big storms that hit the coast. Climate data shows a growing risk of inland rain- and snowstorms, tornadoes, heat waves and flooding. And, research indicates that the interval between weather events is changing.
By not taking these risks into account, insurers are risking their own financial viability. While large, multi-peril companies could survive; smaller, single-peril insurers could fail. Remember that the 2005 hurricane season led to insolvency for a handful of insurance companies in Florida.
For consumers, underestimating or ignoring risks could mean higher rates and fewer insurance companies to choose from. Multi-peril insurers could withdraw from a state — again, this happened in Florida — if claims far outpace loss projections. Or, insurance companies could propose hefty rate increases that states will be forced to accept.
We’ll finish this up in our next post.
AdvisorOne.com, “Climate Change Endangers Insurance Industry: Ceres,” Marlene Y. Satter, Sept. 5, 2011Share