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Climate Finance Series:
Insurance Climate Change Roundtable
Framing Insurance Markets
Boston, September 18, 2015
Cynthia McHale, Insurance Program Director, Ceres
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Those who purchase insurance often have difficulty
understanding what risks are covered, and the basis
for premium calculation.

A typical broad form property policy is a 1-year
contract that covers multiple perils, e.g. fire,
windstorm, hail, vandalism, explosion and smoke.

Insurance for other perils is available by
endorsement for an additional premium, e.g. offpremises utility service interruption, flood and
earthquake.

The premium therefor reflects a “composite” rate which covers
several perils and buildings/structures. (Note that fire risk is typically
the primary peril driving a business's property rates.)

Additionally, catastrophe reinsurance is purchased by insurers to
hedge extreme risk and manage capital; the price is based on
reinsurers’ amount of capital, varies much more than primary
insurance.
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Furthermore, the property insurance market (much like
the real estate market) is intensely competitive, and
pricing reflects current market conditions.


In soft markets, premiums are stable or falling and insurance is
readily available.
During hard markets, rates rise, coverage may be more difficult
to find and insurers’ profits increase.
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After a catastrophic loss, premiums spike, most
insurers refuse to offer large amounts of coverage and
some withdraw from the market.

Following a disaster, e.g. Hurricane Sandy in 2012, insurers
focus on the large loss and tend to ‘over-react.’

Conversely, insurers tend to underprice their coverage during
periods of time when there has not been a serious loss (and
interest rates are high.)

Insurers, along with their regulators and investors need to avoid
fixating on recent large losses and consider the likelihood and
size of future claims payments.
•
Multi-year policies tied to the property rather than the
individual/business are one idea being explored.
•
Such an approach could motivate cost-effective investments
that prevent future losses through premium reductions
associated with loss mitigation measures.
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Catastrophic events expose resilience gaps in
our built environment that result in major
disruptions and large losses.
New York City
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265,000 properties destroyed/damaged
19,729 flights canceled
2 nuclear power plants down
Stock Exchange closed 2 days
New York Marathon canceled
Estimated cost to NY $33b
New Jersey
• Severe damage to infrastructure,
• Major impacts to mass transit &
highway systems
• 2.6 million homes lost electricity
• 346,000 housing units damaged
• Estimated cost to NJ $30b
Source: Swiss Re; AonBenfield Impact Forecasting. “Hurricane Sandy Event Recap Report”
These resilience gaps are expected to widen as climate
change impacts increase.
Growing Extreme Weather Risks (IPCC)
 Heat waves, average temperatures
 Droughts and water shortages
 Heavy precipitation and flash floods
 Surface water runoff, landslides
 Sea level rise, chronic inundation
 More intense hurricane events
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Future insurance availability and affordability in cities
such as NYC and Boston will depend on decisions and
investments we make now to increase resilience.
NYC: Current Scenario vs. 2050’s
$4.4
Expected annual
hurricane losses
from storm surge and
wind
$1.2
+ 70%
+ 168%
(billion USD)
$1.5
+ 88%
$1.7
Source: www.nyc.gov: A Stronger More Resilient New York
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Insurers will need to work with regulators, property
owners and policymakers to devise new solutions to
ensure future insurability.
Summary Conclusions

The frequency and severity of climate driven natural disasters
is increasing.

The percentage of natural disaster damage that is insured is
decreasing.

High potential risks are becoming increasingly uninsurable.

The “current state” of resilience response is not adequate or
sustainable.

A significant investment in resilient infrastructure and
development is required.

Infrastructure upgrades are critical – adaptation should be
implemented as a component of these investments.
Source: Adapted from a presentation ‘The Climate Resilience Gap” by Lindene Patton, formerly of Zurich Insurance.