So what do Munich Re and Swiss Re know that we don’t? Part 2

“If climate change undermines the financial viability of the insurance industry, it will have a devastating impact on the economy, as well.” – CERES report

According to the report by CERES, a nonprofit organization of investors, companies and public interest groups advocating for sustainability leadership, most of the property and casualty companies have strategies to deal with climate variability (the annual and decadal variance inherent to the global climate system). However, climate change is considered “an emergent risk, which will materialize in a future uncertain manner, rather than a factor that already affects clients through hazards such as hurricanes and other extreme weather risks.”1

This lack of planning for climate-related risk is not limited to property and casualty companies. Every segment of the insurance industry is exposed because the entire financial structure of the industry is built on publicly traded financial markets and all the companies they own within those markets.

Just How Exposed Are We?

On October 10, 2012, Munich Re issued a report saying that weather-related losses in North America had quintupled in the past three decades. From 1980 through 2011, weather disasters caused losses totaling $1.06 trillion.2

Prescient indeed, since a few weeks later Hurricane Sandy hit, with a $50 billion price tag for the East Coast. And the $65 billion drought related losses for farmers in 2012 have recently shown the breadth of vulnerability across the country to catastrophic weather related events.

Some corporations and insurance companies are partnering to understand and reduce the risks of climate change to their profitability and to the future of the communities where they provide business services. In 2005 Entergy, the utility company serving 2.8 million customers in four states along the Gulf of Mexico, suffered $2 billion in repair and replacement losses in hurricanes Katrina and Rita.

In 2010 Entergy and Swiss Re partnered to analyze the opportunities and risks of climate change to Entergy’s assets and the communities it works in. Their sobering findings? The Gulf Coast is vulnerable to cumulative climate risk losses in excess of $350 billion by 2030.3

What Can Insurance Companies Do?

Insurance companies are the risk management foundation of our economic structure. That’s why the CERES report and the sustainable and responsible investment industry recommends that

– insurers treat climate change as a corporate-wide strategic issue, and
– regulators continue to mandate annual public disclosure by insurers on the issue of climate change.

For advisors, keep in mind that insurance companies that include strategic development of policies to deal with climate risk are pursuing greater financial stability in their underwriting process. This has the potential to make them more profitable for their shareholders over the long term.

For now, it seems the Germans are leading the charge!

You should consider the investment objectives, risks, charges, and expenses of an investment carefully before investing.

1 “Insurer Climate Risk Disclosure Survey: 2012 FIndings and Recommendations,” Sharlene Leurig and Dr. Andrew Dlugolecki, CERES.
2 “German Insurers Demand easing of Renewable Investing Regulation,” Responsible Investor, March 21, 2013. http://www.responsible-investor.com/home/article/german_insurers_ren_reg/
3 “Value Chain Climate Resilience: A Guide to Managing Climate Impacts in Companies and Communities,” PREP, 2012.