by Sara Donnelly, Mainebiz contributing writer
Rising sea levels, melting glaciers, ferocious weather patterns — climate change at the rate it may be occurring is unprecedented. It’s a phenomenon that requires scientists to evaluate and reevaluate its likely impact: Where will temperatures rise and by how much? What will happen to ocean tides? When, where and how often will catastrophic storms or drought occur? Climate change analysis is a confusing and speculative science, and it therefore presents a unique problem for the insurance industry, which is lately realizing its risk assessment models based only past events may ignore critical threats in a picture still developing.
Since 2004’s eight rapid-fire hurricanes were followed by 2005’s record-breaking damages from hurricanes so destructive their names — Katrina, Rita, Wilma — continue to reverberate in the collective American consciousness, property insurers and their trade organizations have paid more attention to climate change data, though the application of reams of dense and occasionally contradictory data varies by company. The volatility inherent in climate change rankles the industry, says David Unnewehr, assistant vice president of policy research at the American Insurance Association, a property and casualty insurance trade organization based in Washington, D.C. “The top-notch science experts that are serving as consultants to the insurance industry — AIR [Worldwide Corp.] in Boston, RMS at Stanford [University in Palo Alto, Calif.] — they are grappling with that issue right now. They’re trying to look at it and see if there’s a way of capturing some of these predictions and building them into the models.”
Maine insurers have noted the extreme weather patterns, though from a relatively sheltered perch compared with insurers in more battered states along the southern Atlantic Coast.
“The weather patterns of recent years have changed how the insurance companies are looking at their data,” explains Chris Condon, president-elect of the Maine Insurance Agents Association and CEO of United Insurance, a Falmouth-based network of 12 insurance agencies in Maine. Condon says Maine insurers first started paying closer attention to climate change predictions in 2004, when, in one of the most active hurricane seasons in decades, eight hurricanes hit the U.S. coast, causing an estimated $25 billion in total damages. And Mother Nature made sure climate change stayed on the insurance industry’s radar — the following year, Hurricane Katrina helped shatter the previous damages record set in 2001 by nearly two-to-one by contributing to 2005 total hurricane season insurance losses of $62 billion, according to insurancenews.net. Recently, 2008 proved to be a rough year, causing $11 billion in catastrophic insurance losses around the country.
Condon says Maine insurers have since modified their risk models to consider whether a property is vulnerable to a catastrophic disaster over the next 500 years, rather than the previous industry standard of 100 years. Though Maine’s catastrophic weather events remain relatively infrequent (unlike in Florida and Texas, for example, which have been so battered by hurricane damage legislators are scrambling to keep state-run coastal property insurance programs solvent), some Maine property insurers have modified premium prices and plan details along the coast, which is considered more vulnerable than inland areas to freak weather patterns like those associated with global warming, as well as to sea level rise.
Here in the Pine Tree State, insurers are more worried about ice storms than hurricanes. Here, too, coastal properties are the concern. In the ice storm of 1998, the sandy southern coastal counties of York and Cumberland, more vulnerable than the rocky northern coastline, were hit the hardest — nearly 3,200 of the 3,901 total insurance claims from that storm came from those two counties, accounting for $8.8 million of the $11.1 million in total ice storm-related losses to insurers in the state, according to the Maine Emergency Management Agency.
“What we’re seeing locally is insurance companies have changed their view of what premiums they should develop for coastal properties,” explains Condon. For example, Condon points to one of MIAA’s member companies that has since 2007 raised its rates 70% on coastal properties in York County, the county most damaged in the 1998 ice storm. Another company has changed its definition of coastal property, for which it charges higher rates, from within 1,000 feet from the coast to within 5,280 feet, or one mile. Another has added wind deductions, also known as hurricane insurance, that typically force a client to pay an average of 6% to 14% of the property value before the insurer will pay for damage from winds above 74 miles per hour. Phone calls to several York and Cumberland County insurers went unreturned, and Condon would not name the companies he spoke of. “It’s fair to say that every insurance company that I’m aware of in coastal Maine has modified their coastal insurance.”
Reinsurance prompts changes
Just as climate change affects the environment in an intricately interconnected way — in which melting in the Arctic, for example, could affect lobstering off the Maine coast — so do weather catastrophes far from Maine influence the cost of premiums here. The reason is the reinsurance market — the multi-billion dollar industry that provides insurance to the insurers.
To make sure they can cover catastrophic losses, property insurance companies insure their own policies with a handful of global reinsurance giants like Munich Re, Swiss Re and the reinsurance arm of Berkshire Hathaway. That way, if the insurer’s risk projections are wrong and one year more clients cash in their policies than expected, the insurer will remain afloat because reinsurance will pick up the balance. Reinsurance rates can directly affect the cost of the policies the company offers, because the more the insurer has to pay to cover all of the policies it’s written, the more cash cushion it may need to generate from higher premiums. Reinsurers have lately increased their premium costs because of recent catastrophic losses and the global financial crisis’ impact on the reinsurers’ access to capital. And so, even though Maine’s last major catastrophic loss for insurers was the ice storm that occurred over a decade ago, reinsurance premiums for the state and northeast region this year alone increased by about 8%, according to Investment News. Still, that hike is better than the national average — 15% year-over-year — and it’s a fraction of the Gulf Coast year-over-year differential of 30% to 40%.
Maine Mutual Group Insurance, or MMG, is the only property casualty insurance company covering Maine that also has its executive offices in state in Presque Isle. The company, which was founded in 1897 and last year generated $114 million in revenue from about 100,000 unique policyholders, in 2006 expanded into Pennsylvania. MMG has since the early 1980s operated in New Hampshire and Vermont as well as in Maine, and three years ago entered the Pennsylvania market because the area is less prone to extreme weather than other parts of the country.
“If we are able to diversify our company from exposure to weather, it gives us an ability to be more stable in the future,” says MMG Senior Vice President Matt McHatten. And this stability is critical for MMG. McHatten says that in 2007, the company’s historically healthy profit margin narrowed because of severe ice and snow storms that year, and last year damage from similar unforeseen weather whittled that profit margin away to zero. And then, McHatten says, there’s the rising cost of reinsurance.
Because of reinsurance rates, MMG recently raised premiums in storm hotspots York and Cumberland counties between 7% and 10% on average, with some coastal properties seeing even sharper increases. (McHatten stresses rates vary above or below the average based on the type and location of the property.) McHatten says MMG follows the latest climate change reports from the major reinsurers, but the data it uses for risk assessment continues to be generated from past weather events, as has long been the industry standard.
“As a company that is impacted significantly by the weather, we are very interested in what’s going on with climate change,” says McHatten, “but in the immediate, it’s much more about looking at weather patterns and making sure that we’re prepared for what hits.”