Climate Change Risks: How the E&S Market is Closing the Natural Disaster Coverage Gap: Risk and Insurance

Erich Bublitz is senior vice president of the Excess and Surplus (E&S) division of AmTrust. He leads the AmTrust E&S team to support a unified national underwriting appetite by focusing on specific industry segments while pursuing AmTrust’s dedicated wholesale distribution strategy. AmTrust E&S offers its clients a wide range of specialty insurance products through its three main underwriting platforms: Specialty Primary and Supported Excess, Unsupported Excess and Contract Binding.

Every day there are reports of severe weather events around the world. In 2021 alone, there were wildfires in the United States, the third most active Atlantic hurricane season on record, and the winter storm that hit Texas and other southern states. In 2022, add flooding and extreme temperatures to the severe weather combination.

According to the National Oceanic and Atmospheric Administration (NOAA), there were 20 separate billion-dollar climate or weather disasters in 2021, with damage totaling $145 billion.

The three costliest events were Hurricane Ida, the mid-February winter storm/cold snap in the Southeast, and wildfires in the West.

NOAA explains that the number of weather and climate disasters is increasing due to greater exposure and vulnerability and accelerating climate change. Global temperatures are expected to continue to rise due to anthropogenic greenhouse gas emissions, triggering more extreme weather events around the world.

A recent Deloitte survey found that more than half of US state insurance regulators surveyed thought climate change was likely to have a high or extremely high impact on coverage availability and underwriting assumptions. Insurers can no longer avoid thinking about the effects of climate change on their underwriting, pricing and investment decisions.

Impact of climate change on the insurance sector

The insurance market has hardened over the past few years due to many factors including social inflation, nuclear verdicts, increased cyber exposure, inflation, extreme weather conditions and supply chain issues caused by the COVID-19 pandemic. Insurers are now more cautious with potentially unpredictable insurance coverage and challenging business classes.

Property and casualty insurers provide coverage for structures, property and effects that could be damaged or destroyed for various reasons. However, in recent decades, climate change has caused droughts and intensified wildfires and severe weather events such as heavy rains, hurricanes, tornadoes and floods. Natural disasters like these can destroy homes and businesses, increasing damage claims from extreme weather.

While carriers are understandably opposed to traditional catastrophic property coverage, climate change has created new potential for catastrophic losses. While these types of losses could always be modeled, climate change creates catastrophic exposures beyond these models.

Obvious catastrophic exposures – such as coastal and wildfire-prone properties – continue to be difficult for underwriters to underwrite. Due to increased droughts, frosts and tornadoes, these exposures are spreading to areas of the country that were not previously exposed to such hazards.

The impacts of climate change also make it more important than ever that policyholders value their property correctly. With climate change increasing the possibility of catastrophic losses in areas where such losses were not common, failure to accurately value property can result in co-insurance penalties being applied.

Property insurance policies differ based on location and need. Common coverages found in most property and casualty insurance policies should protect against losses due to catastrophic weather events. Some potential insurance-related legal issues could include:

  • Multiple perils, such as separate wind or water damage, which combine to cause losses
  • Multiple occurrences of a weather event, such as three landfalls from the same hurricane
  • Commercial property policies with different deductibles for different types of risks

Climate change and the increased frequency of severe weather events have forced the insurance industry to rethink how it approaches specific covers, develop new products, and review underwriting considerations and pricing to help address climate-related challenges and risks.

Insurance companies must be careful not to underestimate the potential threats of climate change to local economies, small businesses and consumers. The increase in extreme weather events can threaten companies’ business models and make risk insurance unaffordable for small business owners and unfeasible for insurers.

Data analysis and macroeconomic implications can help traditional P&C insurers predict how certain weather hazards might affect them and their coverages over time.

The E&S market sees opportunities in climate change risks

The Excess and Surplus (E&S) market is one of the fastest growing sectors in the insurance industry.

The E&S market is robust, flexible and creative enough to have effective insurance solutions for the most difficult risks, such as risks related to the impact of climate change. E&S brokers and insurers understand unique and complex exposures and can, in most cases, provide customized coverage not available in the standard market to meet their clients’ needs.

Some traditional insurers have stopped covering climate change risks in parts of the country, opening up these opportunities to the E&S market. With their dedicated claims and underwriting teams, the E&S and specialist branches are well suited to deal with the changing risks that some insurers are reducing.

By identifying emerging patterns, loss histories and risk management, E&S underwriters can more accurately assess risk, take a more holistic view of risk and its likely impact, and price their policies accordingly. E&S teams need a deeper understanding of the nature of the claim, particularly in relation to extreme weather events due to climate change, how they occurred, and what mitigation efforts can help reduce risk of a similar claim in the future.

Protect the future with risk management today

With the recently signed Inflation Reduction Act, President Biden has pledged to address some of the issues of climate change to help protect the environment in the United States in the future. Insurers, brokers and wholesalers will need to continue to partner with their customers to help mitigate weather-related challenges and reduce ever-changing climate risks.

E&S brokers and carriers can work with their partners to ensure that their organizations have the appropriate risk management programs in place and meet the needs of their clients to protect against weather risks caused by climate change. &