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Actuaries Can Help Insurers Understand the Complex Challenges of Climate Change

Phoenix—Climate change is steadily increasing the exposures that insurers face and actuaries can take the lead in helping companies understand the threat, according to experts speaking at the CAS Spring Meeting held May 20-23, 2012. In a panel discussion moderated by Vijay Manghnani, FCAS, who chairs the CAS Climate Change Committee, three presenters laid out the threat of climate change to the planet generally and insurers specifically.

A climate scientist presented the case for climate change and blamed the impeded acceptance of the threat on political affiliations and skewed media coverage. A casualty actuary described the potential insurance exposure and how professional standards can help actuaries properly price the growing risk. And a state insurance commissioner discussed how regulators have looked at the issue and what they can do to address it.

Professor Andrew J. Weaver, a climate scientist at University of Victoria in British Columbia, laid out the facts considered by climate scientists who overwhelmingly believe the planet has been getting warmer and will continue to do so, largely due to human activity.

Despite the fact that more than 95% of climate scientists agree about the direction and causes of climate change, the American public is skeptical. American beliefs on climate science change, literally, with the weather. Polling data show the percentage of Americans believing the Earth is warming peaked at 72% in 2008, then drifted down to just over 50% in 2010. It rose to 62% in 2011, most likely thanks to a remarkable string of tornados and other weather disasters. In contrast, about 80% of Canadians believe climate change is occurring, and the percentage doesn’t change much, Dr. Weaver said.

Still, there’s no doubt the planet is warming, as the phenomenon is well-documented according to Dr. Weaver, who said public opinion polling on whether temperatures are rising is really asking: “Do you believe in thermometers?”

Politics lies at the root of American skepticism, he said. Public belief in climate change follows political lines: in 2011, 69% of Democrats agreed the Earth is warming, compared to 41% of Republicans.

Dr. Weaver also blamed poor communications for the skepticism. Scientists have been too wrapped up in the technicalities and jargon of climate science to clearly communicate the issue.

Journalists wrap the issue in sensationalism (“Oceans Rising 150 Ft.” blared one headline Dr. Weaver presented), which makes readers skeptics when they realize the news is overblown. Or the media give undue exposure to skeptics, he said.

 One researcher looked at U.S. “prestige media” (New York Times, for example) and found that more than half of news reports gave equal emphasis to the scientific consensus and to climate-science skeptics. Only 6% of reports unequivocally stated the scientific consensus that humans contribute to global warming.

Insurers will face growing exposures as the planet heats up and weather becomes more volatile, said Tanya Havlicek, ACAS, an actuary with Marsh Captive Solutions who specializes in environmental science issues.

Insurers have been surprised by environmental exposure before, she said. In the 1970s and 1980s, growing understanding of pollution issues led to laws that required polluters to pay for the pollution they caused. Often, that fell to the insurer that issued the polluter’s general liability policy. Insurers were stuck paying billions of dollars in losses for a new exposure with evolving liability. The situation is similar with climate change today, she said. Awareness of the issue is growing, social attitudes toward it are changing, and there is legal and legislative uncertainty in dealing with it.

The obvious exposure is to property insurance: more volatile weather means destruction from more storm events and wildfires. But liability coverages are also at risk, Ms. Havlicek said, pointing to the recent case Kivalina vs. ExxonMobil Corp. et al. In the case, the court ruled that insurers do not have to indemnify or defend a climate change lawsuit. (Kivalina is an Alaskan village that sued a host of companies, alleging their pollution caused the warming that has the ocean buffeting the community.)

That case and others continue to work through the court system. Companies are retaining the risk, even if it has yet to be recognized, quantified, or mandated, Ms. Havlicek said. Actuaries need to understand that and price accordingly—and the traditional actuarial models might not do the trick.

Standard actuarial practice involves using trends from the past to project into the future. But climate science indicates the future will not be like the past. In other words, frequency and severity won’t follow traditional patterns, and the variability of losses will grow.

To respond, she said actuaries will have to develop new models to address the changing climate. They may need to adapt data from non-insurance sources into their work. Actuaries’ professional codes foresee situations like these, Ms. Havlicek said. She noted that professional standards of practice allow actuaries to give non-insurance data more credibility if it is warranted. Failing to do so will leave actuaries and their companies with inappropriate rates and inadequate reserves. Extreme failures could end in insolvency, she said.

Regulators, too, want to make sure insurers understand their exposure, said Washington Insurance Commissioner Mike Kreidler.

“We always have a keen interest in having healthy companies,” he said, adding that regulators can consider exposure to climate change in their examinations of insurers, regulate companies to handle the risk appropriately, educate the public about the risk, and encourage insurers to share their expertise in risk modeling to enhance understanding.

Insurance regulators surveyed insurers in 2010 and some, including those in Washington, are surveying them again this year. Results showed that companies have varying approaches to exposures created by the issue.

Mr. Kreidler emphasized that regulators want insurers to understand the risk today so they can handle it without overreacting, such as leaving the market once the exposure is obvious to all.

No one wants to repeat the situation in Florida, where issues surrounding hurricane risk have caused insurer participation in the market to shrink until the state-run insurer of last resort, Citizens Property, is the largest homeowners insurer. Some states could require companies to offer property insurance in “vulnerable areas.”

Regulators can also help, he said, by understanding that this exposure means insurance prices could rise. “We have to work together,” Mr. Kreidler said, “not just as actuaries and regulators. The last thing we want to see is companies leaving markets.”

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