Raging California wildfires on one coast and the most active Atlantic hurricane season in history on the other are just two examples of how our climate is changing. It’s also changing how the insurance industry prepares for increased risk of property damage and in some cases, in trying to prevent it.
Max Rudolph of Omaha, Nebraska, is a financial consultant who studies risk management. He compiles an annual survey of emerging risks for insurance companies. For the first time last year, insurers named climate change their top concern. Twenty-seven percent of respondents named it their top concern, compared to 7% two years prior. Rudolph said whether it’s wildfires, hurricanes or tornadoes, insurers see it in the data and with their own eyes.
“Whether we are actuaries who are looking at data, or whether it is somebody just trying to live their life, our lives are changing because climate change has triggered some additional events that we didn’t grow up with,” Rudolph said.
He said Hurricane Harvey seemed to be a tipping point. The Gulf Coast storm in 2017 caused $125 billion in damage, making it the second costliest storm in history.
Rudolph said the increased frequency of these once-in-a-lifetime events reminds him of the financial collapse more than a decade ago. He said it became clear old projections no longer made sense.
“You’d see people who were pricing and trading on these risks and they’d come back and say, ‘We just had three 1-in-10,000-year events on consecutive days,’” Rudolph said. “That doesn’t work. If you have them on three consecutive days, that means your data is not telling you the right answer.”
The insurance industry says it is better able to assess risk now. Dale Hall is managing director of research at the Society of Actuaries in Schaumburg. He points to another moment that shook the insurance industry, Hurricane Katrina. Hall said many insurance companies suffered big losses. They have since gotten much better at precisely identifying risk, not just down to the county or ZIP code, but down to each property.
“That prompted much more of the computer technology and very specific latitudes and longitudes now to be tracked on every property,” Hall said. “You see that today as we use Apple Maps or Google Maps how finite you can get to where properties are located.”
Insurance companies also are able to better assess risk through technology, such as artificial intelligence.
“The industry has gone from one that detects and then recovers from catastrophes, and now looks and tries to enable its customers to be able to better predict and prevent those,” said Sean Kevelighan, CEO of the nonprofit Insurance Information Institute.
The institute has produced what it calls a resilience accelerator that analyzes large amounts of data to develop risk assessments. For example, Kevelighan said the accelerator tracks hurricane paths over the last 100 years.
The institute plans to use the tool to develop risk scores for specific properties. Kevelighan said just as smart home technology has helped homeowners detect things like water leaks, the technology could help assess areas where stronger building codes and more weather-proofing of homes may be needed.
But Kevelighan cautioned the data also show more people are living in riskier places than they used to. As a result, he said there’s a growing insurance protection gap–many people don’t have enough coverage.
“There’s a lot of misperception that government will come in and help them recover,” he said. “We work with the likes of big city emergency managers who every day have fires and such in their communities. Often times (they) find in large apartment buildings there’s significant underinsurance.”
For example, Kevelighn said many homeowners mistakenly think their homeowners insurance covers flooding. It does not. You have to buy that through the federal government. In McLean County, about one in 500 property owners has flood insurance, according to Kevelighan.
Some areas are just too risky for insurance companies. Many insurers, including State Farm, have pulled out of some higher-risk coastal properties. But Rudolph said in many instances, the insurance industry and governments perpetuate the problem by allowing redevelopment in places that are likely to get devastated again.
Rudolph called for a more proactive approach to keep people off high-risk land.
“(The question is) how is this going to look 50 years down the road as opposed to, ‘This is my home, I don’t want to lose my home,’” Rudolph said. “I’m very sympathetic to that, but at the same time, if the same event is going to continue to happen, insurance has to be sustainable or it can’t be offered.”
Rudolph said he’d like to see more state and local government buying high-risk properties. That’s been done in Illinois as a form of floodplain management.
As natural disasters increase in intensity and frequency, Hall with the Society of Actuaries said the industry is starting to move in that direction.
“Those are the types of conversations, especially when it comes to California wildfires, that we are seeing happen already,” said Hall, adding some insurers also are sharing some of the risk with consumers through higher deductibles for stronger storms that hit coastal properties.
He said insurers, including State Farm and Country Financial, have diversified by offering more services, expanding their geographic footprints and bolstering their own protection through reinsurance. He said that has enabled them to avoid rate increases that could price some customers out of the market.