Tag Archives: climate change

An Early Taste of Climate Change Disrupting Insurance

There’s a line that I first heard only a few months ago but keep running across: You may think you have a 30-year mortgage on your house, but you really just have a one-year mortgage.

Why is that? Because you have to renew your homeowners insurance every year, and your house is only affordable if your insurance is.

In the vast majority of cases, homeowners have nothing to worry about. Their premiums will change modestly from year to year. But those on the front lines of climate change — along coasts, where water levels are rising, and in parts of the country where wildfires are escalating and violent storms may become more frequent — may face sudden changes that could even force them out of their homes.

California, the bellwether for so many things in the U.S., is again in the lead on this insurance issue, showing how very complicated it will be.

Wildfires have burned more than 2 million acres in California this year. That is already an annual record even though September and October are historically the worst for wildfires.

The possibility of wildfires has put some 800,000 homes at risk of becoming uninhabitable because of soaring insurance premiums or of having insurers simply decline to cover them. State regulators ordered insurers not to cancel policies on those 800,000 homes, which are in or near dangerous areas, but the ban expires in December and can’t be renewed. As this New York Times article details, insurers, regulators and customers are all working to solve the problem — but not having much luck.

Data suggest that, in other areas, insurers are canceling policies or pricing homes out of the market. As the Times reports, “The number of households buying coverage from California’s high-risk insurance program, a costly and bare-bones alternative for people who can’t get private coverage, has increased by more than 50% between the start of 2019 and June 2020, to almost 200,000 households.”

And even that program is becoming less accessible: The article adds that the program “has asked the state for permission to raise its rates by 15.6%, after initially seeking an increase more than double that amount.”

Obviously, insurers need to be able to price based on the risk associated with each home, but it’s not that simple. People demonize insurance companies that pull out of a market or that jack up rates after a disaster — and people vote. So, regulators — at least, those who want to be reelected or reappointed — tend to limit rate increases and may block cancellations.

California has a further wrinkle (as it so often does): Insurers are only allowed to use historical data when underwriting policies. So, even though projections are for the fires to keep getting worse as the climate heats up, that information doesn’t count — it can’t be used in pricing.

State lawmakers attempted a compromise that would have let insurers use projections and incorporate some other costs into pricing, if insurers would make coverage more widely available and provide incentives for measures that would reduce fire risk. But consumer groups argued that the deal was too favorable to insurers, and it eventually fell apart.

Economics has to win. There’s no alternative. Assuming that climate change continues to worsen the wildfire threat in California and elsewhere, insurers will have to increase rates a lot or drop coverage, and homeowners in endangered areas will have to harden their properties to greatly reduce risk, pay those higher rates or move.

As I noted in last week’s Six Things, some 43,000 homeowners have already taken buyouts from the federal government and relocated rather than continue to fight nature in areas being inundated by coastal waters. A similar shakeup will have to account for wildfire and perhaps other types of storms, such as the derecho that damaged millions of acres of Iowa farmland last month and will reduce this year’s harvest by 25% to 50%.

But economics won’t necessarily win any time soon. The failure to reach a compromise in California suggests that the state will muddle along, with consumer groups and insurers at odds and with regulators caught somewhere in the middle.

Muddling along is hardly ideal. A clear vision that could lead to an actual plan would be far preferable. But the best I can suggest is that those of you who don’t live in California and don’t have to experience the dysfunction directly should keep an eye on what we go through. Lots of insurers, regulators and homeowners will likely have to confront issues related to climate change, so you might as well learn from the mistakes by those of us in California so you don’t have to make all of them yourselves when your turn comes.

Stay safe.


P.S. Here are the six articles I’d like to highlight from the past week:

How ‘Explainable AI’ Changes the Game

AI often performs its magic with little insight into how it reached its recommendations. “Explainable AI” makes all the difference.

The Future Isn’t Just for Insurtech

The new promise — the modern concept of insurtech — is a strategy driven by collaboration and innovation rather than disruption.

‘Virtualizing’ Your Customer Service

For the insurance industry, meeting increased customer demands with excellent service requires the right combination of technology and training.

New Operating Model for Insurers (Part 1)

Taking a few key steps will enable an insurer to resolve its operational challenges and lay the foundations for future success.

COVID-19 and Need for Analytical Insurers

Stronger analytics can assist insurers through the COVID-19 crisis, and create building blocks for longer-term business benefits.

Of Independent Agents, Heirloom Tomatoes

Direct vs agency is a silly fight. Neither channel maps cleanly to customer preferences. Both have advantages and disadvantages.

A Lesson From Hurricane Laura?

Although 2020 kept dishing out pain last week — the pandemic, the economic crisis, the protests and counter-protests on racism, our crazy politics and even wildfires and hurricanes — one event wasn’t as absolutely awful as it could have been.

It was still awful: Hurricane Laura caused billions of dollars of damage and killed 14 people in Louisiana and Texas. But the hurricane didn’t cause nearly as much damage as initially feared.

That suggests that people are starting to take the sorts of precautions that will be increasingly important as we have to adapt to the changing climate. Those precautionary principles also represent a key opportunity in front of the insurance industry: to go from indemnifying customers after a loss to helping them avoid those losses in the first place.

Now, some of what happened with Hurricane Laura was just good fortune. The hurricane pretty much threaded the needle between New Orleans and Houston, so it hit mostly rural areas, not the dense populations and expensive properties in those metropolises. The hurricane moved inland quickly, rather than sitting over an area and dumping tens of inches of rain, as Hurricane Harvey did to Houston in 2017. The storm surge, predicted to be as high as 20 feet, peaked at about 11 feet — still an almost inconceivable wall of water washing inland, of course.

But, as this New York Times article details, people mitigated the damage because they learned lessons from Hurricane Rita, which hit Louisiana and Texas in 2005. Rita killed 120 people and did some $25 billion in damage (measured in today’s dollars), including business interruption. Because of Rita, building codes have become much stricter, and structures more resilient. Some houses near the coast, for instance, are now on stilts 15 feet high. Partly as a result, while Laura’s winds were even stronger than Rita’s when the hurricanes made landfall (150 mph vs. 130 mph), the early estimates are that Laura did about $20 billion of damage while killing those 14 unfortunate souls.

Again, the storm was a catastrophe. I grieve for those 14 people, for their families and for all those who are now having to try to knit their lives back together after suffering $20 billion — $20 billion! — of damage. But, assuming that the difference between Rita and Laura wasn’t just 2020 finally cutting us some slack, there has been considerable improvement in the resilience of those in the hurricanes’ path, and I vote for more resilience, with the insurance industry helping as much as possible.

Technology should help. With Laura, the National Hurricane Center got the time of landfall precisely right, more than 3 1/2 days in advance, and was only a mile off in its prediction of the location of landfall. Predictions will only get better, giving people more time to evacuate or find shelter.

The industry can also mine its data for insights that will help people prepare better. For instance, of the 14 people who died in Hurricane Laura, more than half succumbed to carbon monoxide poisoning emitted by emergency generators. With that pattern identified, carbon monoxide poisoning seems like a danger that can be reduced or even eliminated through better inspection or education for those using generators.

Government will need to play a role, too, as climate change intensifies storms and raises the level of the oceans, endangering coastal communities. The Federal Emergency Management Agency (FEMA) has already funded “buyouts” of 43,000 homeowners in the U.S. who chose to relocate rather than continue to fight nature in places such as Isle de Jean Charles, in Louisiana, which has been 98% swallowed by the Gulf of Mexico.

We’re still not out of the woods even on this year’s hurricane season, let alone on everything else that 2020 is throwing at us, but maybe we can take a lesson from Rita and Laura. Maybe we can learn how to be even smarter and more resilient, and maybe the insurance industry can lead the way.

Stay safe.


P.S. Here are the six articles I’d like to highlight from the past week:

3 Big Opportunities From AI and ML

Machine learning can speed underwriting while reducing costs and providing valuable information on why certain proposals fail.

How CISOs Are Responding to COVID

77% of chief information security officers identified incidents that they feel they need cyber coverage for and report being unable to get it.

COVID-19: What Buyers Want Now

Insurers must examine customer pain points and life changes and accelerate digital adoption.

New Sense of Urgency on Going Digital

Events have forced C-suite leaders to realize that their digital transformation efforts need to be expanded and accelerated to light speed.

The Missing Tool for Cyber Resilience

With AI able to assess cyber risk, cyber insurance no longer has to be a long, drawn-out and complicated process.

Payments at the Speed of Light

Insurers and solution providers are making significant advancements to speed delivery of payments and expand digital payment options.

Sustainability in the Time of Coronavirus?

Since the world went on lockdown to stop the spread of the novel coronavirus (COVID-19), satellite images from NASA have captured an unlikely view of planet Earth. Pictures from space showed a dramatic drop in pollution over Wuhan after the central Chinese city implemented coronavirus-related restrictions.

You don’t have to circumnavigate the globe from a spaceship to witness the effects the current pandemic is having on our planet. Urban waterways have cleared up in the absence of human activity. Vapor trails from passenger planes no longer streak the skies above us. Rush hour traffic is nonexistent—it’s like driving to work on a holiday.

The natural world is getting a much-welcomed reprieve from human activity. With national parks closed to tourists, the animals in those parks have begun to move freely about areas that would otherwise be populated by humans taking photographs. At Yosemite National Park in California, rangers have witnessed black bears walking in the middle of the road. And at South Africa’s Kruger National Park, a pride of lions was seen sleeping on a paved roadway that was devoid of motor traffic or any human activity.

Earth is also taking a breather from the constant onslaught of pollutants that humans have been pumping into the atmosphere and dumping on the ground and into the waterways in increasing levels since the industrial revolution.

If there’s a lesson to be learned (and there will be many, when all is said and done), it may be that a deadly and catastrophic pandemic has, in just a few months, noticeably curbed our contribution to climate change.

Let me be clear—a global pandemic is not the path to a sustainable future. But the current crisis has helped shed light on the herculean effort needed to turn the tide if we hope to save our planet for future generations.

Climate change

There are countless ways the current crisis has led to a significant reduction in the emission of greenhouse gasses.

Travel of all kinds has come to a standstill. Very few people are driving to work—or anywhere—right now. Nonessential businesses have closed, and those who can work from home are doing so. Conferences have been canceled. Business trips have been postponed. Vacations have been put on hold. And for the time being, there are no concerts, sporting events, in-person weddings or graduations to attend. According to the Intergovernmental Panel on Climate Change, transportation was responsible for 14% of all global carbon emissions in 2014.

See also: COVID-19: Stark Choices Amid Structural Change  

In addition, power plants and factories in China and around the globe have reduced output. Millions are now wearing face masks in public to avoid contracting or spreading the virus. Ironically, the threat of COVID-19 means they’re also breathing cleaner air when they venture outside.

It’s not just cleaner air; even the water is cleaner in some parts of the world. In Venice, locals say the water in the city’s canals has never been clearer, due to the dramatic drop in tourists.

Future of work

The current pandemic has done nothing less than create a worldwide work-at-home experiment.

Normally, when we talk about the future of work, or work sustainability, we talk about reskilling and preparing today’s workers for tomorrow’s jobs.

But overnight, millions of employees who commuted daily to offices or traveled for sales jobs were forced to stay at home and continue working. For many white-collar employees, their work experience may never again be the same when the health crisis is over.

Companies that provide collaborative technology, like videoconferencing, will benefit from the evolution of work life. Ultimately, that’s good news for the planet and those on the front lines of the climate change battle. Working from home requires less travel, less paper usage and less heating and cooling of office buildings.

For those employees who can best manage their time working in isolation, the hours that used to be spent stuck in traffic can now be applied to personal endeavors, like physical fitness, hobbies or family gatherings. Still, others will struggle with knowing when to shut down their computers and stop working. As such, employers will need to keep their remote workers engaged and ensure they don’t feel isolated or unappreciated.

Many companies, like Zurich, have already introduced flexible work schedules, allowing employees to work out of the office some days or adjust their hours to accommodate their personal lives. These companies are ahead of the curve, and their early action is paying off now.

Digital safety

In today’s digital world, trust depends on cyber security and data stewardship. Many businesses today need to collect customer data to provide goods and services. Protecting that data is important to maintain trust.

Since the spread of COVID-19 was declared a pandemic, there has been a dramatic increase in the number of coronavirus-themed cyber attacks. According to cyber security firm CYE, cybercriminals have been increasingly exploiting the new situation caused by the global pandemic, citing a fivefold increase in cases.

At Zurich, we promise to never sell our customers’ personal data or share it without being transparent about it, and to keep it safe and secure as we put it to work so we can deliver better services. Other companies have made similar promises, but with so many employees working from home on networks that may not be as secure as those in the office, it is becoming harder to protect data.

Remote work on the scale we’re experiencing now heightens digital perils like never before. For financial, healthcare and other businesses, as well as federal and state agencies that deal with sensitive data, there’s little room for cracks in cyber security systems.

There is an increased likelihood of employees using unsecure networks to retrieve sensitive information when working from home or in remote locations. As quarantines become more prevalent and more people are authorized to work remotely, businesses will need to ensure they’re maintaining proper controls to protect customer data.

See also: 10 Moments of Truth From COVID-19  

ESG investing

Environmental, social and governance (ESG) is at the core of how Zurich interacts with its customers, brokers and communities at large, and is also reflected in our portfolio management. We work with stakeholders to ensure responsible and sustainable business practices and to protect reputations while promoting best practices in managing ESG risks. While global financial markets whiplash from daily record gains and to record losses, ESG investing is playing the long game.

Investing in ESG funds is on the rise, according to Morningstar. The Wall Street Journal reports that the coronavirus outbreak has given rise to a number of factors that are important to ESG investors, including disaster preparedness, continuity planning and the treatment of employees through benefits such as paid sick leave and work flexibility.


For many, “sustainability” is the catch phrase of our time. For Zurich, the time is now to stand behind the promises we’ve made to support a sustainable future for our business, our customers and our communities.

In 2019, Zurich signed up as the first insurer to the Business Ambition for 1.5°C Pledge, which is aimed at limiting average global temperature increases to 1.5°C above pre-industrial levels by 2030. We’ve also committed to using 100% renewable power in all global operations by the end of 2022.

In addition, we are preparing today’s workers for the challenges of tomorrow, protecting the personal data our customers entrust with us, and investing in businesses that make the world a better place to live.

Grasping the Perils of Extreme Weather

In 2018, extreme weather had a devastating impact on certain states – primarily driven by increasing severity, rather than frequency, of catastrophic events. LexisNexis Risk Solutions‘ recently released, fourth annual Home Trends Report highlights the impact that the 2018 extreme weather events had on insurance losses. A staggering 56% of all catastrophe claims come from just four states: California, Colorado, Florida and North Carolina.

States hit by Hurricanes Florence and Michael, the California wildfires and severe hail saw the most catastrophic losses. Claims in these states are also up to 56% from the 36% of claims these states accounted for in 2017. The latest Home Trends Report underscores the growing need for insurers to understand and respond to by-peril loss trends and the potential for climate change and extreme weather to drive these losses.

While fire losses have continued to increase since 2012, catastrophe claims accounted for nearly 40% of fire losses in 2018 – the highest in a decade and a significant jump from the previous high of 15%. As a result of hurricane devastation to North Carolina and Florida, 2018 was also the worst year on record for wind claim severity, up 15% from 2017. Hurricane devastation also led to a costlier September in North Carolina, with loss costs 17 times more than a typical September. While Colorado was unaffected by the hurricanes and wildfires, the state ranked the highest in loss cost overall for 2018, as well as the highest over the six-year period (2013-2018) that the study tracks. In terms of hail, Texas continued to top the nation for claims, representing 29% of total volume.

See also: The Future of Home Maintenance  

The report highlights some of the challenges that home insurance carriers face in managing by-peril risks, including increasing severity and unpredictability of weather-related patterns and their impact on catastrophic claims. The report also underscores how it is imperative that home insurance carriers collect, analyze and use aggregated by-peril data to help generate a deeper understanding of the risks associated with a particular location and of how to price future policies accordingly. For the long term, aggregated by-peril data can enable more accurate pricing, a healthier book of business.

If you are interested in learning more about the impact of extreme weather events on insurance losses, click here for the LexisNexis Home Trends Report.

5 D&O Mega Trends for 2020

The range of risks facing company executives or directors and officers (D&Os) – as well as resulting insurance claims scenarios – has increased significantly in recent years. With corporate management under the spotlight like never before, Allianz Global Corporate & Specialty has identified, in its latest risk report, Directors and Officers Insurance Insights 2020, five mega trends that will have significant risk implications for senior management in 2020 and beyond.

1. More litigation is coming from “bad news” events

Allianz continues to see more D&O claims emanating from “bad news” not necessarily related to financial results, including product problems, man-made disasters, environmental disasters, corruption and cyber-attacks – “event-driven litigation” cases that often result in significant securities or derivative claims from shareholders after a share price fall or regulatory investigation related to the “bad news” event.

Plaintiffs seek to relate the “event” to prior company or board statements of reassurance to shareholders and regulators of no known issues. Of the top 100 US securities fraud settlements ever, 59% are event-driven.

One of the most prevalent types of these events is cyber incidents. Allianz has seen a number of securities class actions, derivative actions and regulatory investigations and fines, including from the E.U.’s General Data Protection Regulation (GDPR), in the last year, and expects an acceleration in 2020.

Companies and boards increasingly will be held responsible for data breaches and network security issues that cause loss of personal information or significant impairment to the company’s performance and reputation. Companies suffering major cyber or security breaches increasingly are targeted by shareholders in derivative litigations alleging failure to institute timely protective measures for the company and its customers.

The Marriott case – where the hotel chain announced that one of its reservation systems had been compromised, with hundreds of millions of customer records left exposed – is a recent example of a cyber breach resulting in D&O claims – one $12.5 billion lawsuit among several filings alleges that a “digital infestation” of the company, unnoticed by management, caused customer personal data to be compromised for over four years.

2. ESG and climate change litigation on the rise

Environmental, social and governance (ESG) failings can cause brand values to plummet. And investors, regulators, governments and customers increasingly expect companies and boards to focus on ESG issues, such as climate change, for example. Climate change litigation cases have been brought in at least 28 countries to date (three-quarters in the U.S.). In the U.S., there are an increasing number of cases alleging that companies have failed to adjust business practices in line with changing climate conditions.

Human exploitation in the supply chain is another disrupter and illustrates how ethical topics can cause D&O claims. Such topics can also be a major focus for activist investors whose campaigns continue to increase year-on-year.

Appropriate company culture can be a strong defense risk-mechanism. Many studies show board diversity helps reduce and foresee risk. Regulators are keen to investigate and punish individual officers rather than the entity, forcing directors into increased personal scrutiny to provide assurance that they did due diligence to prevent such cases from occurring.

See also: How to Deliver Tough Message on D&O  

3. Growth of securities class actions globally

Securities class actions, most prevalent in the U.S., Canada and Australia, are growing globally as legal environments evolve and in response to growing receptivity of governments to collective redress and class actions. Significantly, the E.U. has proposed enacting a collective redress model to allow for class actions, while states, such as Germany, the Netherlands and the U.K., have established collective redress procedures. The pace of U.S. filing activity in 2019 has been only marginally slower than record highs of 2017 and 2018, when there were over 400 filings, almost double the average number of the preceding two decades.

Shareholder activism has increased. Approximately 82% of public company merger transactions valued over $100 million gave rise to litigation by shareholders of the target company threatening that the target company’s board will have breached its duties by underpricing the company, should the merger succeed.

4. Bankruptcies and political challenges

With most experts predicting a slowdown in economic growth, Allianz expects to see increased insolvencies, which may potentially translate into D&O claims. Business insolvencies rose in 2018 by more than 10% year-on-year, owing to a surge of over 60% in China, according to Euler Hermes. In 2019, business failures are set to rise for the third consecutive year by more than 6% year-on-year, with two out of three countries poised to post higher numbers of insolvencies than in 2018.

Political challenges, including significant elections, Brexit and trade wars, could create the need for risk planning for boards, including revisiting currency strategy, merger and acquisition (M&A) planning and supply chain and sourcing decisions based on tariffs. Poor decision- making may also result in claims from stakeholders.

5. Litigation funding is now a global investment class

These mega trends are further fueled by litigation funding now becoming a global investment class, attracting investors hurt by years of low interest rates searching for higher returns. Litigation finance reduces many of the entrance cost barriers for individuals wanting to seek compensation, although there is much debate around the remuneration model of this business.

Recently, many of the largest litigation funders have set up in Europe. Although the U.S. accounts for roughly 40% of the market, followed by Australia and the U.K., other areas are opening up, such as recent authorizations for litigation funding for arbitration cases in Singapore and Hong Kong. Next hotspots are predicted to be India and parts of the Middle East. Estimates are that the litigation funding industry has grown to around $10 billion globally, although some put the figure much higher, in the $50 billion to $100 billion range, based on billings of the largest law firms.

The state of the market

Although around $15 billion of D&O insurance premiums are collected annually, the sector’s profitability is challenged due to increased competition, growth in the number of lawsuits and rising claims frequency and severity. Loss ratios have been variously estimated to be in excess of 100% in numerous markets, including the U.K., U.S. and Germany in recent years due to drivers such as event-driven litigation, collective redress developments, regulatory investigations, pollution, higher defense costs and a general cultural shift, even in civil law countries, to bring more D&O claims both against individuals and the company in relation to securities.

The increased claims activity, combined with many years of new capital and soft pricing in the D&O market has resulted in some reductions in capacity. In addition, there has also been an increase in the tail of claims. Hence, there is a double impact of prior-year claims being more severe than anticipated and a higher frequency of notifications in recent years. As for claims severity, marketplace data suggests that the aggregate amount of alleged investor losses underlying U.S. securities class action claims filed last year was a multiple of any year preceding it.

See also: Why Private Firms Should Buy D&O  

Despite rising claim frequency and severity, the industry has labored under a persistent and deepening soft market for well over a decade before seeing some recent hardening. Publicly disclosed data suggests D&O market pricing turned modestly positive in 2018 for the first time since 2003. However, D&O rates per million of limit covered were up by around 17% in Q2 2019, compared with the same period in 2018, with the overall price change for primary policies renewing with the same limit and deductible up almost 7%.

From an insurance-purchasing perspective, Allianz sees customers unable to purchase the same limits at expiration also looking to purchase additional Side A-only limits and also to use captives or alternative risk transfer (ART) solutions for the entity portion of D&O Insurance (Side C). Higher retentions, co-insurance and captive-use indicate a clear trend of customers considering retaining more risk in current conditions.