Updated: May 10, 2022
Lloyd's of London, one of the world premier business insurers, warns of climate extremes negative impact on new policies.
In its 2014 publication "Catastrophe Modelling and Climate Change," Lloyd's of London signaled the wave of the future. “Catastrophe modelling technology is now used extensively by insurers … [for] … risk selection and underwriting … ratemaking … portfolio optimization, pricing, reinsurance decision-making and capital setting.”
In other words, climate change is now a determinative factor in who gets insured, and for how much. In fact, many insurance companies have already withdrawn from at-risk areas in vulnerable states such as California, Texas, and Florida. As a result, homeowners and businesses have to rely on financially shaky state-subsidized programs.
The head of BlackRock, the world’s largest investment firm, stated that climate change is causing a “fundamental reshaping of finance.” Research from the international consulting firm McKinsey & Company concurs. “Financial markets can rapidly reprice assets that are exposed to climate risks. This will affect insurers’ investment portfolios and their own market valuations negatively.”
In response to these fast-changing conditions, insurers are poised to employ new strategies; One such strategy example is from the global consulting firm Deloitte. The firms says they are “incentivizing policyholders who invest in climate-related risks and containing related claims through adaptation measures.” This means insurance companies are now, increasingly, adopting to a certain stance. “We will work with those who work with us to mitigate the cost impacts of climate change.” Businesses need to keep these kinds of measures in mind. It will impact them as they plan to care for their company, customers, and employees in the near future.
For example, if a business is located in a high-risk area, they might consider moving. But how can they ride out a catastrophe if they cannot move? Some businesses are intractably rooted to a spot, like a military base, a hospital or a nuclear power plant. How can these organizations shelter in place, maintain operations, and preserve organizational integrity? These are relevant questions to ask businesses currently situated in low-to-medium-risk areas. No area is likely to be entirely immune from the cascading effects of climate disruption in the coming years.
How can businesses “beat insurers to the punch” by calculating in advance what their risk category is going to be? It is better than simply waiting for their premiums to skyrocket. And what criteria should they apply to the decision about whether or not to move their operations?
Right now, the answers to these questions may be largely ambiguous, or educated guesses at best. But one thing that is certain is that forward-looking companies will rethink what constitutes security. The traditional insurance safety net is thinning rapidly. The realities of climate change are placing enormous pressures on insurance companies. These companies will, in turn, shift much of that burden onto taxpayers and businesses. In the era of continual weather-related catastrophes, businesses will need to carefully plan their own disaster mitigation strategies. They'll need to do this without excessive dependence on their insurance policies.