Insurance and Climate Change
A Way of Life Under Threat

By Pat Long
Vice President

Just as Mother Nature’s retreating glaciers formed the Cape and its barrier beaches 25,000 years ago, she is changing the scene again. Rising sea levels and nor’easters that erode barrier beaches off our coast have been much in the news since the Chatham breakthrough last year.

A way of life in the form of camps and community are being taken by storm or voluntarily dismantled by owners as the threat to the fragile environment increases. These changes are reminiscent of the Whitewash Village that was located on Monomoy in the early 1800s. A hurricane around 1860 shoaled the harbor and led to the abandonment of the village. Another North Beach break disrupted Chatham town life in 1851, and erosion caused the loss of one of the twin lighthouses in Chatham in 1879 and many homes in the 1980s. Nature destroys what humans create.

Our barrier beaches are a microcosm of what is happening in the world at large. More than two thirds of the world’s largest cities are at risk from rising seas and increased storm patterns. Tsunamis, cyclones, tornadoes and earthquakes are daily front page news. While the human loss cannot even be measured, the cost to rebuild from disasters has been severely underestimated and proven impossible to manage.

The Role of Insurance

How does insurance fit into this quickly-growing crisis? Insurance was devised to be the financial protector, the means to keep individuals solvent and the economy flowing. But the industry is finding it harder to interpret risk and accurately predict natural disasters so it can pay claims when losses occur.

For the insurance system to work, there needs to be enough money to pay claims as well as expenses – no matter how many losses occur. Because the costs of these natural disasters are exorbitant, the risk now needs to be extended globally to manage it; spreading risk locally or regionally no longer works.

Reaction

The first reaction by insurance companies was to exclude coverage. For example, North Beach camp owners suffered because they could not get erosion coverage on either a homeowner’s or flood policy. Next, companies shifted a portion of risk to the insured by increasing deductibles, hence wind deductibles. The companies also shifted a large portion of their potential losses to reinsurers, adjusting their risk globally. These exclusions and liability transfer are reactive strategies, based on past occurrences.

But as insurance is being actively shaped by a changing climate, it is becoming apparent that there is an opportunity for the industry to effect positive change that can directly affect climate. In other words, the industry can be a prime motivator to produce cleaner technologies and greener practices.

Insurance companies have begun to steer benefits to those who are environmentally aware and are making better environmental choices, a proactive approach. For example, you may notice green endorsements on policies from forward-thinking companies such as AIG. Pay as you drive insurance plans are being developed that reward less frequent driving, a practice that reduces auto emissions.

Credits for hybrid vehicles are appearing. Sturdier building construction is being required for preferred policies. People and companies that adhere to these greener policies are considered good risks and thus are rewarded.

An Appropriate Partnership

Can insurance and Mother Nature work together to positively influence our society? Since climate has impacted insurance in such a large way, it certainly seems an appropriate partnership.

Although the number of climate-related insurance products is growing, only one in ten insurance companies is actually trying to promote climate change. European companies seem to be moving in that direction more quickly than domestic companies. The good news is that former Vice President Al Gore and many U.S. think tanks are working to improve our national response. Stay tuned.