Has the insurance industry failed to heed the climate change warning?

Insurers described as "scrambling" when decades could have been spent in preparing

Has the insurance industry failed to heed the climate change warning?

Catastrophe & Flood

By Terry Gangcuangco

A Financial Times report has pointed to a decades-old Munich Re paper that cited the need to keep an eye out on climate change back in the 1970s.

It was reported that the reinsurance giant’s paper highlighted the importance of studying global warming, polar ice melt, and other environmental changes, given that their potential impact on long-term risk trends had scarcely been examined.

Five decades later, the effects of climate change have left insurers “scrambling,” the FT said, and even led to a property insurance crisis in certain regions. Industry veterans have also expressed concerns about adapting to the changing climate.

“It doesn’t seem like we are changing fast enough for the pace of change we have to adjust to,” the FT quoted William Berkley, founder and executive chair of WR Berkley Corporation, as saying at a New York University event earlier this year.

Industry insiders cited several reasons for the sector falling behind. One major issue is the one-year term of insurance policies, which discourages a long-term perspective. Additionally, according to the report, risk models have been slow to reflect the impact of accelerating climate change on day-to-day losses.

Meanwhile executives acknowledge that the industry is now adjusting its assessment of threats from floods and fires.

“Everyone has been surprised [by the surge in secondary perils],” admitted Christian Mumenthaler, outgoing chief executive of Swiss Re. It’s a fair criticism that we fell behind.”

Mumenthaler explained that predicting how global warming affects localised events, such as floods impacting specific buildings, has been challenging.

Julie Serakos of Moody’s RMS added that factors like population growth in vulnerable areas and inflation in payouts complicate the situation. “There’s just more exposure to these types of events,” Serakos was quoted as saying.

Significant investment is now directed towards new tools and expertise to help insurers develop a longer-term view of climate impacts. The risk, however, remains that models may not fully capture catastrophic outcomes.

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