Insurance Companies Rewriting the Future

In Spike Lee's heartbreaking retrospective of Hurricane Katrina, When the Levees Broke: A Requiem in Four Acts, we hear the angry laments of survivors who were denied insurance benefits for damage because - their carriers claimed - water damage was not covered in their policies.

Katrina was an exceptional event in the universe of risk management that is the domain of insurance companies, and when it comes to compensation, the insurance company is the final interpreter of its own policy language. For an event as huge as Katrina, a policy for protection from hurricane damage may be interpreted as specific to the effects of high wind, excluding the accompanying storm surge or torrential rains. Insurance adjusters on the ground are given their marching orders and scripts, while policy holders are left standing dumfounded and incredulous to deal with the total losses of their homes and property.

As one New Orleans resident put it, "There is a special place in Hell for these insurance adjusters." This is the reality we're looking forward to. You may not be "in good hands" after all. Insurance companies are about showing profit to shareholders; they are not sentimental, nor are they altruistic. As this blog has reported here and here, insurers are reassessing their assessment methods to prevent losses in an increasingly threatening environment. [This is not meant to be an indictment of all insurance adjusters, who, when it comes down to it, have their hands tied by policies from on high. See comments posted to this article.]

A column in the Washington Post describes one upside of the rising alarm among insurance companies - their joining the chorus demanding immediate reduction of worldwide greenhouse gas emissions.

Ten years ago, Peter Levene, chairman of Lloyds of London, was skeptical about global warming theories, but no longer. He believes carbon emissions caused by human activity are warming the Earth and causing severe weather-related events. "At Lloyds, we feel the effects of extreme weather more than most," he said in a March speech. "We don't just live with risk -- we have to pick up the pieces afterwards." Lloyds predicts that the United States will be hit by a hurricane causing $100 billion worth of damage, more than double that of Katrina. Industry analysts estimate that such an event would bankrupt as many as 40 insurers.

Lloyd's has warned: "The insurance industry must start actively adjusting in response to greenhouse gas trends if it is to survive." The Association of British Insurers has called on governments to "stem ominous weather related trends" by cutting carbon emissions. U.S.-based companies AIG and Marsh -- respectively, the largest insurer and broker -- have joined with other corporate leaders to urge Congress to reduce U.S. greenhouse gas emissions 60 to 80 percent by mid-century. AIG's policy statement on climate change "recognizes the scientific consensus that climate change is a reality and is likely in large part the result of human activities that have led to increasing concentrations of greenhouse gases in the earth's atmosphere."

Good for them, but meanwhile for all localities with vulnerability to climate change impacts, this stands as a major issue, for as risks rise for damage or destruction from storms, floods, wildfires, drought and sea level rise, we know that insurance companies are making their adjustments in advance. They are taking their place - consistent with their profit-oriented mission - in the vanguard of climate change risk management.

Of course, this means that policy holders and buyers must begin to examine the small print with even more care and scrutiny than before. Insurers understand that a direct hit by a Katrina-like storm on a location like Miami could bankrupt them if every potential claim is filed. This creates even more incentive for property owners to protect themselves proactively and defensively.

So get more involved in local mitigation activities - reduce your local eco-footprint, pressure your local government to take protective measures addressing the threats that apply to your area, and finally, improve your property's survivability in the face of those threats. Don't rely on your insurance policy to save you. And as part of that, start putting together your local adaptation strategy. Reduce your community's risk level wherever you can.