WIN Magazine - Summer 2017 - 25
climate change effects, the authors estimated that flood risk could increase by
as much as 14 times the current levels
under current warming trajectories
(Paudel et al. 1724). Corresponding premiums would rise to compensate for the
greater risk, and would increase by 400%
in the best-case scenario (and 3200% at
worst). Eventually, insurance premiums "may reach the point where flood
insurance becomes unaffordable for the
majority of homeowners". Wholesale
insurance companies would be especially impacted by this rise in flood risk.
Because "standard [...] insurance policies
in the Netherlands exclude coverage for
damage caused by flooding," flood insurance is relegated to excess and surplus
companies or government-sponsored
programs (Surminski et al. 1461).
A world with fluctuating temperatures
and increasingly unstable weather patterns would experience more powerful
natural disasters that raise risks for insurers. Premiums rise to offset anticipated
higher losses, and risk-averse insurers
may choose to abandon certain segments
altogether. Thus, as the ones responsible
for writing policies for more volatile industries, MGAs are particularly susceptible to
the threat of climate change.
LOSS PREVENTION IS KEY
To lessen these risks, promoting loss prevention is key for MGAs. Risk segregation
is one potential solution. By "segregating"
risk, i.e. separating clients into different
risk categories and charging different premiums to each, companies can reduce risk
as well as incentivize loss-reducing behavior among clients (Botzen and Bergh 417).
For example, a business located in an area
that is prone to flooding might choose to
relocate to lower the premiums. MGAs can
inform clients about potential "damagereducing measures" like flood-resistant
More innovative techniques to disburse risk include alternative risk
transfer (ALT) mechanisms. Financial
instruments like catastrophe bonds and
industry loss warrants allow insurers
to transfer risks to the capital market
(Banhalmi-Zakar et al. 33). Though more
expensive than commercial reinsurance
premiums, they have the potential to be
a more cost-effective risk-sharing option.
CLIMATE CHANGE AS
Paudel et al. explain that insurance
companies "can also play an important
role in providing incentives to homeowners to implement adaptive and risk-reducing measures". In the words of scientist
Evan Mills, "the insurance industry is
uniquely positioned to further society's
understanding of climate change and
advance creative solutions".Sustainable
development is a hallmark of corporate
social responsibility (CSR). Mills lists a
number of categories of actions that the
insurance industry can take; the most
important are listed below.
PRODUCTS AND SERVICES
Insurers can champion "green" technologies like they do for fire safety and
buildings. The company stands to benefit
directly: green tech is often less vulnerable to losses, which justify lower premiums (Mills 339). The insurance industry
can promote innovative solutions like
renewable energy and carbon capture
and sequestration (CCS) by both insuring promising companies and directly
investing in various initiatives. Crafting
innovative insurance products and services for such these companies opens
up new markets for wholesale insurers.
Climate change poses a threat to
financial markets. Extreme natural
disasters jeopardize communication
channels and make costs of capital more
volatile (Stern 122). As a result, more
and more companies divest money to
addressing climate. Current investment
"is a modest portion of all investment in
this space and a vanishingly small part
of insurers' own portfolios," (Mills 343).
Australian researcher Michael Hawker
explains that "the future reputation of
the insurance industry will be dependent on how we manage this issue".
As the ones
for more volatile
the threat of
ACT AS A GLOBAL LEADER
Finally, insurance companies have the
chance to lead by example by fully committing to sustainability in their own
offices and supply chains. The global
insurance industry directly emits about
12 million tons of carbon dioxide each
year, a carbon footprint that is equivalent
to that of 2.5 million US cars (Mills 344).
Shifting to more rigorous in-house carbon
management strategies could help insurance companies build credibility as they
advance other sustainability advantages.
Human-caused warming has the potential to exacerbate the effects of natural
disasters and cause large-scale losses
for insurers of all types. Recognizing
and adapting to the impacts of climate
change is important. Abandoning the
traditional "'gloom-and-doom' outlook"
is crucial. The insurance industry must
seize its chance to make a concrete difference in the world (Mills 351).
Zhihan Jennifer Zhang is
a Junior at Arizona State
University, and is one of
the winners of the AAMGA's
2017 Risk Management
& Insurance Student
White Paper Contest. Her advisors are
Dr. Jelena Milovanovic, ACIA, AIAA, and
Dr. John Zicarelli, FCAS. Contact her at:
firstname.lastname@example.org, or come and meet Zhihan
in person at the AAMGA 2017 Annual Meeting.
AAMGA.ORG | S U M M E R 2017 | 25