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Insurance Against the Future

Ten separate billion-dollar weather disasters have hit the United States this year. And in one corner of the ring, with an ice pack on its brow, is the reeling insurance industry.

It may be time for it to re-evaluate the threats and refresh its risk-management strategy.

Erratic and severe weather events, which are expected to increase in frequency as climate change advances, challenge traditional insurance practices that analyze historical patterns to understand the probability of future risk.

“For a long time, this has been very, very effective for most property and casualty insurance companies,” said Paul Kovacs , the founder and executive director of the Institute for Catastrophic Loss Reduction , in an interview. “Companies assume that if they look at history, they can get the price right.”

But climate change throws a wrench in the works and is already wreaking havoc on balance sheets and shareholder value, according to Sharlene Leurig of the nonprofit research group Ceres. Ms. Leurig was the lead author of a report released last month that examined how the insurance industry is responding.

Titled “Climate Risk Disclosure by Insurers,” the report found that, despite a broad industry consensus on increased risks from climate change, on average only one in eight insurance companies has a formal climate change policy in place — and that such policies tend to focus narrowly on extreme coastal weather.

The devastation wrought by Hurricane Katrina in 2005 galvanized discussion of climate change among American insurers, Ms. Leurig said in an interview, but the discussion focused on hurricanes rather than the development of broadly defensive policies. “The response was essentially to stop writing business in coastal areas,” she said.

But this year a majority of losses were driven by inland storms. “That makes it a really hard puzzle to solve if you’re an insurer: how do you actually diversify risk if you might get hit by a multibillion-dollar loss just as easily in Kansas as in Florida?” Ms. Leurig said.

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