Ellen Mecray, regional climate services director for the National Oceanic and Atmospheric Administration, and Jeff O’Shaughnessy, senior vice president of treaty for HSB, explore strategies to tackle evolving climate risks through data, technology and partnerships.
The escalating impacts of climate change pose an unprecedented challenge to the stability of the insurance industry. What exactly are the strategies available for insurers to adapt, innovate, and fortify against the evolving risks presented by climate disruptions?
Q: Climate change is certainly one of the most pressing issues, if not the most pressing issue of our generation.
But the big takeaway for this discussion is that there are reasons to be optimistic about the ways the insurance industry can take action against and make an impact. Is that about right?
O’Shaughnessy: It certainly is a major issue. We’re all dealing with and clearly avoidance does not appear to be an option, but there’s an opportunity for us to pivot to awareness education and then of course move towards adaptation, resilience and ultimately mitigation.
So, we’re really bullish about the tools that are available to the entire industry in terms of data and technology and how we can change. In fact, I recently read a book that was talking about the climate crisis and the comment in there quote was that “humanity will need to alter the way we live.” As I think about that, the issue is we can either wait for the change to happen for us or we can be part of the change.
And I think that as an industry we owe it to ourselves and our communities to make that change.
Q: What can NOAA tell us about climate as a pressing issue?
Mecray: I think that NOAA can say a lot about what’s happening in terms of the physical risk that companies, both the insurance industry and reinsurance industry can deal with. I also want to mention the optimism piece when it comes to the national climate assessment that was recently released.
The tone there was really that it’s up to us. And so I really appreciate your comments there, Jeff. It is up to us. There’s a quote right from, I’m going to age myself, from the $6 million man. And it says, “We have the technology.” So we do have the technology. And I think it is that combination that I think we’ll get into here later.
But what can NOAA tell us? A lot. In par,t we have our tool called the Billion-Dollar Disasters and that really does a map and a graphical representation of the kinds of disasters that we’ve seen over the last several years.
We’ve been tracking this since the 1850s in the observed record and we also do a projection forward out through 2050 with great confidence and then out into the future beyond that.
We are seeing things like the billion dollar disasters are showing. Heavy duty areas like Florida, Louisiana, Texas and California are being hit multiple times by these disasters.
We’re seeing just, in 2023, we’ve had $25 billion disasters. That’s one every two weeks. That’s not at all what we thought back a few years ago when we thought it was going to be one every few months.
So, it’s really been quite an escalation of these extreme events that companies are having to deal with. We’re looking forward to that partnership with the companies. Just thinking about the intensity of these events.
We’re talking about both severe storm risk. We’re also talking about tropical cyclones, extreme precipitation being seen in lots of parts of the country. Extreme precip meaning too much and too little.
We seen too much water in areas like Vermont this summer. We seen too little water…and catastrophic events that are cascading from drought events into wildfire events.
Som all across the country and we would encourage you guys to look not only at the Billion-Dollar Disasters tool to see that in the map view but also to see our time scale looks using climate at a glance, which you can Google and find online.
Q: Where does data and technology play a role within the insurance industry and how can they help inform clients about risks and exposures?
O’Shaughnessy: How do we best leverage this combination of technology and data together to move ourselves from what for hundreds of years has been a repair and replace approach and reaction to predict and prevent and to be more proactive.
So, we think about shifting that paradigm by leveraging data and technology, and there are a number of ways that we’re doing that. One way, of course, is partnering with organizations like NOAA, and fully leveraging these robust and informative data sets that are available. Not just leveraging them in a traditional manner, but identifying and finding nontraditional correlations and the like that we can use within the industry for underwriting or risk selection or loss prevention identification.
Secondly, with technology, there’s a number of ways that we’re utilizing things like sensors, temperature sensors, for example, to identify impending freeze conditions in businesses or in seasonal businesses, seasonal homes that cannot only mitigate, but in the case of imminent freeze can predict and avoid losses.
Typically you’re talking about less than $100 for a device to make folks aware that a pending event is happening.
Q: You said you’re working together with NOAA, but how is HSB working with other carriers to be aware of the potential impact and risks involved with climate challenges?
O’Shaughnessy: We’re working with nearly 100 different P/C carriers today around both, I’ll call, immediate and future long-term efforts to respond to climate disruption.
We talk about it in both direct loss, indirect loss, and then even how can we help carriers from a purely attritional loss create more room for loss ratio dollars to be applied to climate related losses. Some of the examples are as I said before freeze conditions within a business or home. Certainly the idea of perishable goods that can result from being a traditional electrical outage or something brought on by climate. Then additionally we’re working with our climate companies to kind of look around the corner and into tomorrow to figure out how can we leverage data technology. Some of our engineering efforts and expertise at HSB, as well as the broader ecosystem of our partners and our parent Munich Re to respond to and to come up with new solutions to these evolving problems, particularly around climate disruption.
Q: What’s being done at the federal level on working with the underserved?
Mecray: It’s something that the federal agencies have been spending a lot of time focusing on in the last few years. We’ve been working together across the federal agencies to help identify where these communities are located and what are they underserved against? Is it that they are single family homes or they are lacking transportation, the ability to move out of harm’s way?
We’re mapping different factors that would contribute to these communities being considered underserved. Then we’re also offering grant programs and technical assistance around the country from different federal agencies, from Environmental Protection Agency, the emergency management groups, and so many other agencies. It’s not just about the grants, it’s really about thinking about affordability more broadly.
Considering the insurance market, it’s no longer just simply the thinking about affordability, it’s not just about rate change, in other words, it’s about the overall change in affordability.
Are people going to elect to not be insured at all? And what does that look like? We would love in NOAA to partner with insurance and reinsurance to think collectively about the impact that we have on these communities.
Q: I would be interested in hearing from both of you as to what can the insurance industry due to adapt and Ellen why don’t we start with you on that?
Mecray: Well I think part of that is thinking about the different levels of affordability. I’m not an insurance specialist. I’m a climate scientist, but I do think that when I think about people adjusting and adapting to a changing climate, it’s things like Jeff was talking about, installing sensors, getting ahead of the problem, thinking out to 2050 where we do have confidence and thinking, how can we better prepare?
Is it just education? Is it technical assistance to apply for and successfully receive federal dollars? Is it that public-private partnership that we’re looking for between the private carriers and the public carriers and how we manage that insurance of last resort?
O’Shaughnessy: I totally agree with Ellen’s comments. I would say that the the biggest issue is how do we think differently? As an industry, how do we not repave the Cow Pass, so to speak. How do we leverage those, our broad ecosystem of public and private partnerships, working with local, state, federal authorities. Working with a lot of our great industry association partners, and making sure that we’re building a future where insurance can still be relevant and bring meaningful help to business owners, homeowners, and communities. To do that, we need to provide services, coverages, responses that lead to sustainability, resilience, and ultimately, I would say even promoting the insurance industry as someone who’s not necessarily there on a bad day as we’ve been in the past, but we’re there every day to make things better.
Q: What has NOAA been doing in partnership with the insurance industry?
Mecray: It’s really been an exciting time in NOAA in the last few years of really diving into our partnerships, not only with the Reinsurance Association of America, which we’ve been partnering with for years, but also more directly property and casualty portions of companies and in some cases some of their boards of directors.
But in all of those cases, it’s really about that education component that Jeff was talking about and trying to support the companies as they explore the risks posed by a changing climate and also the risks into the future.
What can they do about it is something that I think Jeff has been talking about, but what we’ve been doing about it is partnering with the National Science Foundation and creating these industry university partnerships to dive into the question that everybody’s been asking, which is how do we blend catastrophe risk modeling with climate risk modeling and thinking about that into the future. So, really excited about how that partnership is going to come together by 2025.