The term "global warming" entered mainstream consciousness on August 8, 1975, when Wallace Smith Broecker published a paper titled "Climatic Change: Are We on the Brink of a Pronounced Global Warming?" in the journal Science. This significant publication marked the beginning of a heightened awareness and scientific exploration of the phenomenon. Today, you rarely hear the term "global warming", as it became politicized over the last 20 years, and has been replaced by "climate change."  Whether politicians believe in climate change or not doesn't really matter, as when it comes to risk management, the insurance companies have been believers for years.

"Global warming" and "climate change" are often used interchangeably, but they actually refer to different aspects. Global warming specifically pertains to the increase in global temperatures caused by the accumulation of greenhouse gases in the atmosphere. On the other hand, climate change encompasses broader and long-term changes in various climate indicators, such as precipitation, temperature, and wind patterns. For insurance companies these changes have impacted their loss ratios in the form of more frequent and severe insured losses due to wildfires, hurricanes, and flooding.    

The impact of climate change on insurance companies has become increasingly evident in recent years. In California, the devastating wildfires of 2017 and 2018, which were exacerbated by climate change, led to a financial disaster for insurance companies, wiping out a staggering 25 years' worth of profits. This is not an isolated incident, as globally, the period from 2016 to 2018 accounted for over 70 percent of insured losses from wildfires between 1980 and 2018. It is clear that the frequency and severity of natural disasters, such as wildfires, hurricanes, and flooding, have significantly affected the insurance industry, with the number of billion-dollar disasters doubling over the past two decades.

This has forced insurance companies to reevaluate their risk management strategies and adapt to the changing climate landscape. The consequences of climate change are not limited to financial losses alone, but also pose a serious threat to the resilience and sustainability of insurance programs and the overall economy.

Some have responded by raising premiums, making insurance less affordable for homeowners.  Across thirty-one states, double-digit rate hikes have been observed since January 2022, with six states experiencing increases of 20 to 30 percent.

Additionally, some insurance companies have chosen not to offer coverage altogether. State Farm and Allstate, the two largest homeowners insurance providers in the country, announced a temporary suspension on issuing new policies in California. Farmers Insurance has also imposed limitations on new policies in the state. American International Group (AIG) has scaled back property insurance coverage for homes at risk of flooding on the east coast and homes at risk of wildfires in the western United States. In Florida, the high costs associated with hurricane losses and lawsuits have led nearly a dozen insurance companies to go bankrupt, while others like Farmers and AAA have restricted coverage policies. In hurricane-prone areas of Louisiana, insurance companies have refused to underwrite policies.

In response to the increasing frequency and severity of natural disasters, state governments have implemented backstop property insurance programs. These programs serve as insurers of last resort, providing coverage to high-risk homes when access to private insurance becomes limited. Over the past four decades, these backup programs have seen a significant rise in participation as worsening extremes drive higher claims. From 2013 to 2022, the aggregate value of all insurance in force in state-created property insurance plans, such as FAIR Plans, nearly doubled. These programs play a crucial role in ensuring that homeowners have access to essential coverage, especially in areas prone to disasters.

After hurricanes pummeled Louisiana in 2020 and 2021, the number of homeowner policies issued by Louisiana’s state-run program more than tripled. This prompted the state’s insurance commissioner to call the situation a “crisis.” California, which has also seen a massive increase in government-issued policies, has temporarily banned insurance companies from refusing to renew policies in areas near those recently burned. This year, insolvencies of property insurers in Florida and Louisiana forced those states to borrow hundreds of millions of dollars to make sure claims got paid.

While the focus of this issue is on climate change, the underlying theme is that typically insurance companies are the first to recognize emerging risks from all four risk quadrants:  hazard, operational, financial and strategic.  If an organization wants to get an idea of where they have potential risks, they should look to what an insurance company excludes from coverage or how they have priced the coverage.  Homeowners insurance has been hardening for years, but now we also see that same hardening in cyber liability with higher premiums, higher deductibles, reduced coverage limits and more requirements to obtain coverage.  An enterprise risk perspective can help you identify and assess those risks early...which is even more important for those risks that are not insurable.