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Climate Change Forecasts Trouble for the Insurance Industry

Climate change is increasing the frequency and severity of winter storms, hurricanes and wildfires, presenting the insurance industry with an increasing risk and the challenge of how to manage its exposure.
Insurance Law360
November 30, 2018

By Jeffrey Gordon
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New Englanders are no strangers to nor’easters; strong storms that crawl up the Northeast coast bringing heavy precipitation, strong winds and coastal flooding. But even by New England standards, some recent winters have brought a barrage of these storms. In March 2018, for example, four powerful coastal storms (some tagged with the ominous-sounding designation “bomb cyclone”) battered the area with wet snow, rain and wind. Ocean water flowed into downtown business districts and a subway station.

It seems counter-intuitive initially, but warmer temperatures from climate change are likely to increase the precipitation and severity of winter storms. Warmer than normal ocean temperatures provide an extra kick for nor’easters, and heat in the arctic may cause changes in the jet stream that allow cold arctic air to permeate southward.[1]

When storms hit, residents and businesses bear the brunt of it. But, the insurance industry is also in the crosshairs. If and when risks increase, the insurance industry is among the first to detect the reverberations.

Although the impacts of climate change are likely to be experienced everywhere, places like Boston are especially susceptible to rising sea levels. Large swaths of the coastal harbor city sit atop man-made landfill built just high enough to keep buildings and roads dry from high tides and storm surges. As coastal flooding becomes more frequent and intense, Boston’s population, homes and buildings are increasingly threatened.

The main problem is the swift pace of the expected change. While a slower process could provide time for communities to more organically reposition population centers and key infrastructure, we do not have the luxury of time. Unfortunately, adaptation to the increased risks is lagging in many vulnerable areas, exacerbating the potential consequences.[2]

There are, however, measures that communities can take to mitigate the risk of property damage. Greater mandated setbacks from the water, construction of flood walls and other barriers, elevation and relocation of structures and infrastructure farther from vulnerable coasts and encroaching ocean water would all help to protect property. Unfortunately, there is little evidence that these defensive measures are occurring in any meaningful way.

The climate does not seem to be cooperating with the slow pace of adaptation. The 30-year period from 1983 to 2012 was likely the warmest 30-year period in the last 1400 years in the Northern Hemisphere.[3] A report by the city of Boston predicts that Boston’s sea levels will rise rapidly: by at least 9 inches by 2030, 21 inches by 2050, and a staggering 36 inches by 2070.[4] The rising seas are likely to be accompanied by continued increases in the intensity of extreme rain and snow.[5] Since 1958 in the Northeast, precipitation increased by 70 percent on the days with the heaviest precipitation.[6] This will continue to increase. The federal government’s recently released National Climate Assessment predicts that coastal property losses will range from $92 billion to $118 billion per year nation-wide by the end of the century as a result of climate change.[7]

Tropical storms and hurricanes represent another climate change menace for the Atlantic coast and beyond. Warm ocean water is the fuel that powers hurricanes, and warmer ocean temperatures mean stronger hurricanes. There are also signs that hurricanes are intensifying more rapidly, without warning. On its way to becoming one of the strongest hurricane to ever strike the United States, Hurricane Michael churned through Gulf of Mexico waters that were up to 3.6 degrees Fahrenheit warmer than average.[8] This helps explain why the storm intensified from a Category 2 storm to a Category 4 monster in just 24 hours, taking residents by surprise.[9]

New research predicts that over the next 20 years and beyond, there will be more hurricanes overall and more severe hurricanes than what has been experienced historically. There is even discussion that a new “Category 6” rating may be necessary to describe the terrifying super hurricanes (with maximum sustained winds above 190 mph; 33 mph above the 157 mph threshold for a catastrophic Category 5 storm) predicted to become more common over the upcoming decades. And as population density increases, there will be more property and infrastructure in the way of these giant storms.

It's not just storm activity either. An increased risk of wildfires is also linked to warmer temperatures from climate change. Warmer temperatures dry out plants, and drier plants provide more fuel for wildfires to start and spread. Longer summers lengthen the fire seasons in fire-prone areas.[10] Increased property development in fire-susceptible areas raises the risk too. In 2017, California suffered the costliest wildfires in the state’s history at the time, with almost $12 billion in insurance claims during from October to December 2017 alone.[11] It has not been better in 2018. In November 2018, California’s devastating Camp Fire destroyed a staggering 14,000 residences after 17 days of burning through more than 150,000 acres to become California’s worst fire ever.[12] Unlike many flood losses, fire losses are covered by typical property policies.

Climate change cannot be blamed for any one storm, wildfire or other natural calamity. Nevertheless, in the aggregate, climate change will cause significantly increased risks to property, and therefore to the insurance industry.

The insurance industry is on the front line to deal with the increased risks brought by climate change. Clearly, it is a core business issue confronting the industry. After all, insurance is the primary mechanism to carry and transfer risk from severe weather. The combination of continued development and increased property values in vulnerable areas and greater frequency and severity of weather-related catastrophes presents significant challenges.

Lloyd’s of London states that weather-related losses have increased from $50 billion annually in the 1980s to nearly $200 billion per year over the last 10 years.[13] According to Munich Re’s NatCatSERVICE, extreme weather has caused $560 billion in insured losses from 1980 to 2015.[14]

In 2017, natural disasters caused $138 billion in insured losses, and $340 billion in losses overall.[15] Thus, only 41 percent of total losses were insured. Fifty percent of the insured losses were in the United States.[16] It is possible that the gap in insured and uninsured losses indicates unmet demand for insurance products that signify potential business opportunities for the insurance industry. But significant downside risk remains, even accounting for potential business opportunities. The temperature increase will be gradual on a global scale, but the risks of severe weather will be distributed unevenly and volatile from year to year. As the climate changes, the predictive power of historical weather patterns erodes, and insurers will be forced to develop new models to estimate future risk.

Premium pricing for certain coverages will need to be recalibrated to accurately reflect changing circumstances. Such pricing will need to account for increased risks in certain geographical areas, the mitigated risk in communities that invest in protective measures, and for individual policyholders who take preventive measures to protect their property. The extent and types of coverage available in certain areas may also need to be examined. Insurers have an opportunity to rewrite and reprice their policies each year.

As chief climatologist at Munich Re, Ernst Rauch said recently on National Public Radio, at “the end of the day, someone has to pay for the increasing risk caused by climate change.”[17] The insurance industry will play a substantial role to determine how this risk is shared among insurers, policyholders and governments in the decades ahead.

Jeffrey Gordon is a senior associate at Zelle LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firms, their clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.



[3] Id. at 11.

[4] Coastal Resilience Solutions for East Boston and Charleston, Final Report, October 2017, at 22.

[5] Imagine Boston 2030, City of Boston at 99.

[6] Id.









[15] “A Stormy Year,” Topics Geo Natural Catastrophes 2017, Munich Re at 1.



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