From CAT 5 to Secondary Perils, How Insurance Is Battling Climate Change from an Underwriting and Investment Perspective

As climate change events increase in frequency and severity, insurance companies have no choice but to shift their underwriting and investment focus.

By: Maura Keller | August 6, 2022

Insurance companies have always analyzed the frequency and severity of weather events. However, when it comes to climate change, the industry has had to modify the equations being used in its underwriting and actuary evaluations.

Alison Nisonger, head of property underwriting Global US, Swiss Re, said the industry has been challenged in recent years with a large uptick in the frequency and severity of catastrophe events. 

For example, prior to 2017, wildfire wasn’t a topic for the industry and then two unprecedented events, each causing more than $10 billion is losses, occurred in 2017 and 2018 after several years of drought in California. 

“Now, we see wildfire losses on a yearly basis and not only just in California but also arising in other states such as Oregon, Colorado, New Mexico, etc.,” Nisonger said.

Hurricane frequency has also increased in recent years, and the industry is seeing different types of losses arising from these events. 

Nisonger noted that with rising temperatures, scientists expect to see an increase in the rainfall induced from hurricanes which will shift losses from wind to flood damage as seen in Hurricane Harvey in Texas and Hurricane Ida in the northeast.  

“Outside a shift in frequency and severity of events, there is also a recognition that climate change directly impacts insurers/reinsurers,” Nisonger said.

Consumers, shareholders, and regulatory bodies want to understand how the insurance industry is addressing climate change in its portfolios, not just on an underwriting and risk analysis standpoint but also in terms of its investments and its own carbon footprint.

“Today we are looking at mitigating this risk from all angles of our business: from the risks we write, carbon we emit, to the companies we invest in,” Nisonger said. Thus, the industry really is tackling climate change from multiple dimensions.

“Rather than relying on historical data to model out future trends, insurers have increasingly had to develop predictive modeling based on projected assumptions,” said Helen Eichmann, senior vice president, Allied World Environmental Division.

“At Allied World, we talk about underwriting ‘looking through the windshield’ rather than the rear-view mirror.”  

In Eichmann’s view, the driving force behind focusing on climate change issues is the desire for corporate sustainability, meaning a firm’s ability to remain a viable enterprise and also to contribute to a sustainable economy overall.

“Climate change is and will continue to pose challenges to our customers and to our own business. On a very fundamental level firms must navigate the challenges posed by climate change to be successful in the long term,” Eichmann said.

“Companies who keep the blinders on may not endure.”

Areas of Climate Change Concerns

The insurance industry breaks out natural disasters into critical CAT (hurricane, earthquake, and European winter storms) and secondary perils, such as wildfires, winter storms, flooding and tornado/hail. 

For a long time, there has been a lot of focus put on critical CAT and subsequent models to assess these perils. However, as Nisonger pointed out, recently secondary perils have become a larger portion of catastrophe losses, making up over 60 to 70% of insured losses in 2020 and 2021, per the Swiss Re Institute.

“The challenge is secondary perils are not modelled as well and thus the industry is really only at its infancy in understanding how to properly assess, quantify and make portfolio steering decisions based on these perils,” Nisonger said.

In fact, 2021 was the first year that two secondary peril events generated losses over USD $10 billion with the winter storms in the U.S./Texas and the flooding in Europe. 

“It’s clear that getting the impact from secondary perils right will be critical in the sustainability of our industry and battling climate change,” Nisonger said.

Eichmann pointed to additional climate change issues that intersect with the insurance industry, including the insurer’s investment portfolio, the impact of climate change on customers and the impact of climate change on an insurance company’s direct operations.

Consequently, many in the industry are starting to consider how climate change-related matters inform investment decisions. They are also looking into marrying insurance products with risk mitigation services that can help control losses.

Company Efforts

Allied World recognizes that more information and study is needed to understand climate change risks in a comprehensive way. For close to 10 years, Allied World has partnered with the Natural Wildlife Federation (NWF), one of America’s leading conservation organizations, to examine these issues. 

In addition to partnering with NWF, Allied World offers policyholders an array of risk management resources which they can access to help them identify, evaluate, and respond to risks that are heightened by climate change, such as wildfire, flooding, extreme heat and others.

At Swiss Re, one big area of focus is product development, where the company looks to develop unique insurance covers that help clients manage the risks associated with a changing climate. 

According to Cole Mayer, senior structurer, Swiss Re Corporate Solutions, one example of this is parametric hail. With this product, Swiss Re uses a physical metric, in this case hail size, to trigger a policy. The use of this metric allows the insurer to pay very quickly (within days of the event) and provide very broad, flexible coverage. 

It also allows industry to protect energy resources that are themselves viewed as renewable.

“One area where we are looking to deploy this approach is with solar projects,” Mayer said.

“These solar sites are very hail prone, and severe hail events can significantly hamper production for a long period of time (particularly when supply chain disruptions are delaying the production and shipment of new panels). 

“Our parametric cover can not only help existing projects better manage the risk, but can also help supplement the necessary insurance capacity to allow a project to get off the ground (which increases the number of solar facilities and helps move us toward more greener power production).”

Kevin Stein, CEO, Delos Insurance

Vertically integrating catastrophe and climate modeling expertise into all levels of an MGA – from its view of an individual risk through to portfolio level exposure is the way Delos Insurance addresses climate change exposures with its clients.

The company does this by marrying its expertise with data from Delos’s wildfire models to aggregate and analyze exposure and concentration to drive profitability, according to Kevin Stein, the company’ CEO and founder.

Delos has determined that out of the approximately six million homes across 13 states that struggle to find insurance because of wildfire risk, only around half of them are actually exposed to significant hazard.

“Delos has not insured a home yet that has burned,” Stein said.

Client Concerns

When the Swiss Re team talks with clients, three main concerns come up with respect to climate change. The first is the impact on the traditional insurance market and available capacity. 

“Corporates and public entities have seen larger deductibles and tighter coverage terms as the natural catastrophe insurance market has hardened (which was and is necessary to maintain a sustainable insurance market),” Mayer said.

“As our clients retain more risk, they are looking for long-term sustainable ways to address this increased risk.”

The second concern is how climate change affects their increasingly complex business models; Swiss Re has seen how various global events that wreak havoc on a supply chain, and many suppliers and customers are in heavily natural catastrophe exposed areas. 

“How our clients manage their ‘contingent’ natural catastrophe exposure is a huge consideration for them,” Mayer said. 

Finally, clients also are thinking about how they themselves can help move the conversation around climate change, and the concrete steps society needs to take to mitigate it.

According to Stein, with the dramatic increase in the number of fires and the ensuing scale of destruction, there are a lot of folks in California who weren’t in a fire region in the past, but who now are.

“They didn’t move into a disaster zone, a disaster zone moved into them,” Stein said.

“Compounding the problem is that wildfire models that insurers had been using are unable to keep up with the changing peril, causing many insurers to pull out of any market they suspect may be potentially exposed,” Stein said.

“This leaves many people living in wildfire-stressed areas who simply cannot find reasonably priced homeowners’ insurance, if they can find insurance at all,” Stein said.‍

Continuous Evolution

Insurance companies have helped shape societal behavior in the past, for example in the areas of fire safety, worker safety, driving safety and others. 

That’s why Eichmann believes the insurance industry’s focus on climate change will increasingly lead to specific underwriting and pricing mechanisms to help account for the industry’s heightened exposures, accompanied by additional resources to customers on how they can mitigate them. 

Craig Poulton, CEO, Poulton Associates, LLC, owner of CATcoverage.com, which administers the Natural Catastrophe Insurance Program, believes that significant strides will be made in technologies that will allow greater predictability as to geographic areas that will be impacted by climate change.

“Additionally, great progress will be made in granular analysis of risk characteristics, especially geo-spacial risk characteristics,” Poulton said.

“These new technologies will eventually be adopted by and implemented by insurers across the globe.” &

Based in Minneapolis, Minnesota, Maura Keller is a writer, editor and published book author with more than 20 years of experience. She has written about business, design, marketing, health care, and a wealth of other topics for dozens of regional and national publications. She can be reached at [email protected].

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.