September 26, 2023

Global Warming and Insurance Underwriting 2024

Posted on September 26, 2023 by Jeffrey M. Pollock

Although most insurance carriers do not speak in terms of global warming, the insurance market is making rapid changes in response to increased storms, tornadoes, rain, flooding, wildfires and other natural disasters. Because insurance (or the lack of coverage) impacts environmental settlements, property purchases/sales, and property ownership, this article addresses the major trends that will impact both you and your clients over the next several years.

  • I. Global Warming is Causing Increased Catastrophic Weather Events—and Insurers are Noticing. Insurers have been whacked with significant catastrophic weather claims on an increasing basis. In response, carriers are taking the following steps across the country:
    • A. Property Valuation. Historically, the question of property value for both residential and even industrial facilities was a rough approximation and not really a subject of detailed discussion. No more. Carriers want definition and detail on property value, flood risk, replacement cost, comparative real estate, etc. and rather than waiting till there is a claim the insurers are fine-tuning their models now, you should expect that both you personally and any companies you advise will face more questions and more frequent questioning regarding actual value. You should expect this to increase in a high interest rate environment because inflation makes determining actual property values and replacement cost more difficult.
    • B. Better modeling—More Intrusive Evaluation. Historically insurers used frequency of events as the basic model for underwriting coverage. Today, carriers are creating very sophisticated weather and anticipated weather driven damage modeling. RMS (Risk Management Services) Moodys and others are changing from antiquated risk modeling for Property & Casualty. Munich Re is investing heavily in companies like Zanskar, which create artificial intelligence driven weather risk analysis. Notably, the biggest risk is not necessarily what is insured—it may well be the risk that is uninsured and those failing to obtain insurance.
    • C. Reduced coverage or simply not renewing coverage. In areas of Florida and Louisiana in particular, it is simply not possible to buy significant limits on coverage because the carriers will not underwrite them. This is leaving many policyholders with the coverage of “going naked” (i.e., without coverage). Assuming that global warming is real and that escalating storm events/flooding are increasingly likely, we may anticipate that getting insurance—or getting any significant level of insurance coverage—is going to be increasingly difficult.
    • D. Group Coverage. One proposal I have made to several of my clients is to form their own risk group. Typically, this has been done in the pharmaceutical or medical device field. Several policyholders A Co, B Co, C Co, D Co) form a risk retention group where all they all pay in a premium, which is typically invested. When one gets hit with a claim, they are covered. This actually arises from Chinese insurance over a 1,000 ago.
    • E. Forming a Captive? A captive insurance company is a subsidiary of the parent company. The parent company is the insured. In short rather than paying premiums to a carrier, the insured (the parent company) invests in assets owned and controlled by the subsidiary. The cost of forming a captive is significant but the premiums paid to the captive are deductible by the parent. The fundamental issue is typically size—a company should have at least $10 million in annual net revenue before considering taking on forming a captive.
  • II. Smoke Insurance for Vineyards. Although I like a smokey scotch, there does not seem to be much of a market for smokey chardonnay. In California, there is now a significant demand for vineyards for insurance coverage to address the risk of excessive smoke and smog impacting vineyards. Environmental Risk Managers Inc (ERMI)—and soon others—will be offering smoke and pollution taint coverage. Grapes, in addition to making nummy wine, an lose their value if tainted by smoke. Global warming is increasing the frequency and intensity of smoke.
  • III. Environmental Justice And Corporate Reporting—Insurers are Watching. Environmental justice is really a regulatory risk and not a direct claim risk. That said, many settlements are increasingly facing an environmental justice component and carriers expect that risk to rise. Put differently, the claim is not an environmental justice claim but environmental justice issues such as supplemental environmental projects are being inserted into the agreement to address historical concerns for that community.
    The SEC first suggested that environmental matters be included in corporate disclosures in 1971. As time has progressed, there is an increasing pressure from the SEC under the 1933/34 Acts to report. Bloomberg has created a Climate-Related Financial Disclosure Site: CERES also has a site:
  • IV. Be Ready for More Hyperfocus on Chemistry. In general insurance carriers were not motivated to learn the intricacies of isolated intermediates, inadvertent product and even fugitive emissions. That is changing rapidly. PFAS, PFOA, Phthalates are now under great scrutiny by insurers in underwriting risk and the insurers are not waiting for the USEPA to lead the way. In underwriting coverage your clients should expect far more focus on what chemistry is at your client’s facilities and what they are generating by way of fugitive emissions. Fugitive emissions are typically the result of equipment leaks, piping flanges, storage tank connections, and the process of loading/unloading chemicals. The State and USEPA are increasingly focused—and therefore the carriers are focused—on fugitive emissions as a discharge point for air, soil, and water emissions.
  • V. New Pollution Conditions Coverage. Policyholders are looking for coverage to address discharges and releases that occur today. As you are likely aware, insurers tried to eliminate insurance coverage by introducing the Pollution Exclusion in the early 1980s and then the Absolute Pollution exclusion (1985). This left the insurance market in a state of flux for years as various new forms of “environmental coverage” were introduced. The newest one is the New Pollution Conditions Coverage policy, which appears upon close examination to be illusory coverage. This is a London Market policy subject to New York law—and New York law is the US law most favorable to the insurance carriers.
  • VI. The Internet of Things. IoT. As you likely know intercountry shipping and interstate transport of goods accounts for a significant amount of discharge leading to global warming. Global warming is in turn creating significant and more frequent hazards for the shipment of perishable goods (wine, beer, White Castle?, meat, fruits). Extreme temperatures for extended periods of days are “baking” goods in their refrigerated shipment containers. Your Tempranillo may have been boiling as it went through the Suez canal and freezing as it travelled north past South America. To counter and control these concerns insurance carriers are increasingly including internet devices on containerized goods. The first form is a recorder that tracks what happens and is then downloaded upon receipt of the container. The second and increasingly more frequent form of transponder tracks the heat on a live basis and reports that temperature.

Conclusion: Global warming is creating increased risk of catastrophic loss. Having learned painful lessons from an increasing number of weather related events and the increasing cost of those events, insurers are (1) measuring this risk more carefully, (2) this means that your clients will be facing more intrusive analysis of their properties and their operations, and (3) the new pollution conditions are tricky and provide actual coverage in only the narrowest of circumstances.