**INSURANCE, CLIMATE CHANGE**

**AND SUSTAINABLE DEVELOPMENT**

# Introduction

The American Insurance Association (AIA) believes that the vulnerability
of the U.S. property-casualty insurance industry to climate change is
sometimes overestimated. A more refined picture of potential risk
emerges when information is presented on how the industry operates; the
diversity of insurance products; its financial strength; and how it
responds to weather-related risk.

-   We believe that the critical challenge facing the insurance industry
    with regard to weather-related exposure is the significant risk from
    hurricanes that has grown exponentially in recent decades due to
    rapid growth in population and development along vulnerable
    coastlines.

-   With or without climate change, there are a number of sustainable
    development concepts that help the environment and at the same time
    are compatible with sound insurance principals.

-   There are significant questions regarding climate change and
    possible scenarios---the complexity of the climate system and its
    numerous feedbacks, the role of clouds, and the ability of forests,
    agriculture and oceans to act as carbon sinks.

####### Hurricane Risk 

-   For insurers, potential impact of climate warming on the frequency
    and intensity of hurricanes remains a key area of interest. No other
    weather event has the potential to deliver catastrophic losses that
    could endanger the solvency of a substantial number of insurers. The
    UN-IPCC reports have been inconclusive on hurricanes, indicating
    that there is little evidence that a general warming would result in
    an increase in the frequency and severity of hurricanes. Some
    research seems to indicate that warming could suppress hurricane
    development in the North Atlantic. For example, the El Nino climate
    phenomenon is a known suppressor of hurricane development and models
    indicate that climate warming could result in more frequent El Nino
    events. However, insurers and reinsurers do support and monitor
    ongoing research on hurricanes and climate change.

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-   The most critical factor impacting hurricane damage potential does
    not relate to climate change, but rather the tremendous growth in
    population, homes, commercial development in the most
    hurricane-prone regions of the United States, especially Florida,
    the Carolinas and the Gulf Coast.

# Profile of the P/C Industry: Diversity and Resilience 

Damage from weather events is only one of many perils that are covered
by different lines and products provided by the property-casualty
insurance industry.

-   Only six out of over 25 property-casualty insurance product lines
    have moderate or significant exposure to weather losses. Together
    these six personal and commercial property-related lines represent
    approximately one-fifth of industry premiums. Remaining lines,
    accounting for 80.8% of the industry's premium base, have limited or
    no exposure to weather events. For the one-fifth share that does
    have a moderate or significant weather exposure, weather is only one
    of a number of covered perils that contribute to the premium base
    and stability of the line.

-   Flood insurance and crop insurance are federal programs in the U.S,
    underwritten for the most part by the federal government. The
    industry participates in the flood and crop insurance programs and
    earns revenues by assisting in administration through education and
    marketing programs, policy issuance, and claims adjustment. U.S.
    insurers generally are not financially exposed to flood and crop
    losses.

-   Auto insurance provides an example of a product with very minor
    exposure to climate change, but one that is also a major source of
    the property-casualty industry's financial strength and stability.
    Private passenger and commercial auto insurance account for nearly
    half (48.3%) of the U.S. non-life premium total.

> **Adaptation and Sustainability**

-   A common assumption made by those contending that the insurance
    industry will be severely impacted by climate warming is that
    insurers will be unable to respond and adapt. Insurers constantly
    monitor risk and loss experience, and are accustomed to changing
    conditions. When conditions change, insurers have some ability to
    manage risk and adjust to the new trend though a number of tools
    including rating, underwriting, and loss mitigation, subject to
    regulatory constraints.

-   Sustainable development concepts can help with any needed adaptation
    and in many cases are compatible with sound insurance principals.
    Mitigation and sustainable development make sense in any climate.
    Insurers, homeowners, businesses and communities, are currently at
    risk from major natural disasters, even in years where overall
    weather patterns appear to be relatively benign. For example,
    Hurricane Andrew, the most expensive disaster the insurance industry
    has experienced, occurred in 1992 when hurricane frequency was
    relatively low and suppressed by a mild El Nino climate pattern.

-   As with automobile and highway safety, insurance companies are
    advocates for catastrophe mitigation. Implementation and enforcement
    of strong building codes, new building technologies to bring about
    better roofs, windows, and structural connections will make homes,
    businesses, and communities more resilient to natural disasters.

-   Land use planning is another technique gaining interest as a
    strategy for better assessing the costs and benefits of building in
    areas at high risk from natural hazards. Discouraging additional
    development in flood plains, beachfronts, earthquake faults, and
    areas subject to mudslides and wild fires is totally consistent with
    sustainable development and sound insurance principals. Any limited
    development that does occur in such areas should be built to more
    resilient standards than development in less hazardous areas.

-   Sustainable development and energy efficiency policies affecting
    risk and insurance should be fully examined to ensure that they do
    not create new hazards. Some examples that provide a match between
    risk reduction, insurance, and energy efficiency:

-   **Energy savings and loss control:** The U.S. Department of Energy
    and insurers have identified areas where energy efficiency
    improvements also reduce fire, explosion, liability, and winter
    storm hazards.

-   **Public Transportation and Other Non-Driving Alternatives**:
    Property-casualty insurers are generally supportive of increased
    investments and improvements in public transportation, and other
    initiatives that encourage less congestion including "smart growth"
    strategies, car pooling, and pedestrian and bicycle access. These
    strategies reduce energy usage and promote cleaner air. For auto
    insurance and highway safety, they reduce congestion in urban areas
    and stress on drivers that leads to increased accident rates, and
    provide increased options and mobility for higher risk teenaged and
    very elderly drivers.

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-   **Telecommuting** is a sustainable development idea that ties in
    very nicely with our earlier agenda item on E-commerce. Increased
    telecommuting takes drivers off the road during the highest morning
    and afternoon rush hours in the most congested urban areas where
    accident rates and insurance costs are the highest. Telecommuting
    also reduces energy consumption and emissions.

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-   **Speed Limits Have Safety, Insurance, and Environmental Benefits:**
    Experience during the 1970s and 1980s with lower national speed
    limits of showed that lower speeds not only save energy and reduce
    greenhouse gas emissions, but also lower deaths and injuries on the
    highways.

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-   **Cautionary Note**: Some well-intentioned proposals for climate
    change mitigation could have a negative impact on risk, safety, and
    the insurance process. "Pay-at-the Pump" or pay per mile auto
    insurance is an example of one climate change proposal that would
    undermine the basic risk-based insurance process and negatively
    impact vehicle and highway safety. Pay per mile does not adequately
    address more important risk factors in driving such as the age of
    the operator, driving record, vehicle type, where miles are driven
    (congested urban vs. rural), and other significant variables.

American Insurance Association

DLU---11/28/2000