A house destroyed by the derecho is pictured Sept. 14, 2020 on 27th Street NE in Cedar Rapids. CREDIT ANNIE SMITH BARKALOW
A new study by a University of Iowa researcher has found that, when it comes to climate change risk management strategies, insurance companies gravitate toward an “out of sight, out of mind” approach. In his study “Insurers’ climate change risk management quality and natural disasters,” Tippie College of Business associate professor of finance and co-author […]
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A new study by a University of Iowa researcher has found that, when it comes to climate change risk management strategies, insurance companies gravitate toward an “out of sight, out of mind” approach.
In his study "Insurers' climate change risk management quality and natural disasters,” Tippie College of Business associate professor of finance and co-author Thomas Berry-Stoelzle found that insurance companies are more likely to strengthen their climate change risk management strategies when a natural disaster occurs in the state where the company is headquartered.
Thomas Berry-Stoelzle, University of Iowa Tippie College of Business associate professor of finance and co-author of the study. CREDIT UNIVERSITY OF IOWA
It’s an example of personal bias and salience, the study posits, the concept that people are more likely to focus on information or situations that directly pertain to them.
“From an academic standpoint, we know that individual decision makers have their personal preferences (and) biases, and those play a role when (an) individual makes a decision,” said Mr. Berry-Stoelzle.
Standard economic theories of investment choices expect companies and organizations to operate in a rational way, but “the simple argument is that (at) the end of the day, we have managers, individuals, making decisions, and so we can expect that there are similar biases at play, in the way they would make their personal financial planning decisions or investment decisions,” he said.
In 2020, 79% of global insured property losses caused by natural disasters occurred in North America, resulting in $69.8 billion in insured damages, according to a 2021 report from Swiss Re that was cited in the study.
With their bottom line taking a hit, insurance companies are dropping out of some regions altogether. Landlocked regions like the Midwest, once considered a safe bet by risk management companies, are increasingly prone to natural disasters, and insurance premiums are skyrocketing, in some cases.
The derecho that caused wide-spread damage in Iowa in 2020 was named the costliest thunderstorm in modern U.S. history at $11 billion, according to the National Oceanic and Atmospheric Administration. IMT Insurance, Secura, Celina and Pekin Insurance have since dropped Iowa customers, leaving policy holders scrambling for a substitute for property insurance.
In October 2023, Pekin announced it was “restructuring” to ensure long-term success of the business, focusing instead on commercial and life insurance, where the impacts of current environmental challenges are reduced.
“Severe and erratic weather patterns combined with the impacts of rising inflation earlier this year have challenged the ability to keep home and property premiums at manageable levels while paying ever-increasing claim amounts,” read a statement on their website.
“As the industry changes, so must Pekin Insurance. Focusing on our Commercial and Life Insurance strategy will ensure our continued financial stability for now and many years to come,” Dan Connell, chairman of the board, president, and CEO of Pekin Insurance, said in the statement.
Looking ahead to the next few years, “I think the insurance industry is positioned well to play more of an active moderator role,” said Mr. Berry-Stoelzle.
His study examined climate risk disclosure reports from around 900 property-liability and life insurance companies between 2012 and 2020, incorporating data from the international disaster database EM-DAT to calculate the number of natural disasters per state, matching this information with the states where the insurance companies are headquartered.
In the study’s sample, insurance companies that participated in the NAIC Climate Risk Disclosure Survey were used.
The survey featured eight individual questions focusing on various aspects of climate risk management. It assessed several related topics, including whether companies manage climate risks in their investments, or have a strategic process in place. “And we use text-based analysis to extract information out of those text blocks and create a quantitative measure of how well they manage the process,” Mr. Berry-Stoelzle added.
States like California and Florida, especially along the coastlines with significant real estate development in high-risk areas, represent some of the largest risk zones in the U.S., he continued. Regulatory pressures in these states have prevented insurance companies from fully reflecting the actual risk in their premiums, leading to suppressed rates. As a result, changes in how insurance is managed in these regions are expected.
And as insurance rates increasingly reflect actual risk, real estate development and living in high-risk areas will become more expensive. “There is no other solution, either paying up or changing how we develop and use land,” Mr. Berry-Stoelzle said.
Mr. Berry-Stoelzle co-authored the study with Simon Fritzsch, Philipp Scharner and Gregor Weiss of Leipzig University.
