Diverse Weather Patterns and Their Impact on the Insurance Industry
Spencer Foulk
Old Dominion University
RMI 412: Probability and Liability Co Operations
Professor Harvey
November 15, 2024
Introduction
The Insurance Industry exists as one of the most complex businesses out there due to the number of probable issues and potential risk insurance that must be put into effect for the safety of clients. Insurance plays a huge part in many of the day-to-day tasks and items that we hold dearly to ourselves. Insurance is a huge part of the housing market and the maintenance of your place of refuge, a huge part of the car space when it comes to damage that is invoked accidentally by others, and further examples like restaurants that seek insurance plans for their business. Insurance plays a huge part in deciding who is or isn’t liable, which is why it is a necessity in the world today. This significant importance of the insurance industry also made it difficult when considering a trend due to the plethora of topics that exist to speak on. Nonetheless, I concluded to discuss the topic of changing weather patterns and their influence or rather effect on the insurance industry. I will inform the reader about changing weather patterns in the insurance industry by outlining what can or should be done in the event of such situations, the impact on important sources of data and actuarial predictions, historical experiences and lessons that were learned which would affect current handling, obstacles that the insurance industry faces due to the severity and level of havoc from such weather effects, and the effect of pricing that changing weather patterns have on pricing.
What Can Be Done
Tools exist to decide the probable occurrence of problematic weather effects to prepare the world for possible damage. While these tools exist reliability is often low which leads to an inability to reliably predict the weather patterns that occur daily. This makes it difficult for the insurance industry to decide on claims and premiums for certain areas due to such instances.
However, there exist a few ways that would make the impact and severity less potent as a response. One of the first ways includes a better understanding of the problems that are being faced by the weather patterns. For example, much of the data that is used to record and report on such weather patterns is usually non aggregated. Due to this, the information becomes a crucial beneficiary and,” allow policymakers to better assess the potential impacts of climate-related losses on insurers’ ability to serve consumers as well as on the stability of insurers and the financial entities that depend on insurers continued safe operation.” (Granda 2024) This is a great first start in the right direction and is complimented by efforts of encouraging the management of climate risks by insurance regulators. This is important because by encouraging the management of climate risks, this allows a possible net zero decarbonization target which will be beneficial on behalf of the clients under the insurance policy. By using the guidelines mentioned previously, insurance regulators will be able to aid in the use of climate risk management measures by insurers. These guidelines are a useful tool, but checking for the use of possible blue lining is also necessary to improve upon the way that things are done. “Blue lining is an “emerging practice in which financial institutions increase prices or withdraw services altogether from regions they perceive to be at high environmental risk, most commonly insurance, credit, and banking services.” (Granda 2024) This is an unhealthy yet slightly understandable practice in areas where high risks and potential loss can occur. While such risks and potential for loss exist, this should not lead to an all-out removal of premiums and services and should instead prompt a study of the area to provide a different yet sustainable policy for people in the area. This would make it so that people in the area can indulge in premiums that are not skyrocketed through the use in price. A final thing that can be done to prevent the impact of weather effects on the insurance market would be to use tools to remove systematic risk. By using such tools systematic risk can be potentially neutralized before its effect on financial and economic related sustainability. Climate change will continue to exist as an area of concern for the nation in the insurance industry due to its vast nature which is why we should indulge on instances of prevention and resolutions as early as possible.
Impact On Data
Weather patterns are constantly changing and varying due to worldly and humanly created effects. The melting of the polar ice caps, decrease of the ozone layer, and increase in carbon dioxide are just a few of the instances that can cause disruption. This is why,” weather data is one of the key factors that insurance companies use to underwrite and price insurance products. Weather data can have a significant impact on both aspects of insurance operations, as it affects the ability to evaluate risk for the insurer and to understand prior damage to properties.” (Baron Weather 2024) This impact on the ability to evaluate risk is what sometimes leads to the use of blue lining as mentioned in the previous paragraph since often there isn’t enough data or data is changing so often that it becomes difficult to provide for a reliable insurance and premium plan. Another area where this becomes a problem has to do with construction and long-term project plans. Let’s for example say that an underwater project is taking place for the construction of a dome like Atlantis as an attraction-based site. Insuring such a project, depending on the location and geographical area, would quickly become cumbersome due to a plethora of factors that have to be considered for. If this project was planned to take place over the course of six years, then data about the effects of tsunamis in the area, data about the relocation of sediments in the area, and data about the surrounding land features would be of upmost importance for the insurance of the constructed attraction, workers, etc. The main takeaway of this has to do with the effects of climate change on data and predictions that are made based on previously used information.
Historical Lessons Learned
Since weather patterns and effects have been on an ever-lasting change over the last few years, it has allowed for the creation of updated or rather renewed plans for the benefit of the clients. One historical experience with weather patterns where insurance agencies were able to learn and act accordingly was during the twenty nineteen tornado that occurred in Dallas. Tornados are some of the most dangerous, costly, and varying events alongside hurricanes that exist in the world today. Much of the talk around tornado’s is mentioned around places close to the Gulf of Mexico where there is a remarkably high occurrence. The one that occurred in Dallas Texas recently lead to,” over $2.2 billion in damage, making it the costliest tornado loss in Texas history.” (Swingle Collins 2024) This led to a multitude of damage to the surrounding areas and people of the area who later had to move out because of the instance. This led to a huge learning experience for the people involved about the differences that exist between insurances and the policies that are created. A good example of this would be the car market where you must at least have liability insurance to drive on the road. While this is doable in the short run and leads to a lower premium, it does not remove other potential occurrences that could occur nor is this saying that such a thing could exist. It is simply gambling. While it is typically a gamble, people in the area that have knowledge about the weather events and patterns that could lead to catastrophic damage should take it upon themselves to get a plan that would better suit them for an instance like the 2019 Dallas Tornado. An unfortunate lesson was learned this day that could have been prevented with the use of studying of the general area or advice consultation from the insurance providers about coverage that would help due to the area that said individual is living in. Nonetheless, the weather is constantly changing by the second which often leads to such events taking people by surprise.
Obstacles Faced
As with any business or corporation, potential obstacles exist as a concrete wall that can either hinder all operations of the process at hand or lead to a minor inconvenience that must be dealt with in the future. Due to this, the insurance industry can face a lot of backlash and problematic conditions at a high severity rate because of obstacles. A perfect example of the obstacles faced by weather effects would the 2019 Dallas Tornado that was mentioned previously. We discussed that the event was a major learning experience for the residents of the area, but we did not discuss the repercussions and insurance side of things and what they ended up having to deal with. Most of the people that were caught in the disastrous event did not realize that they did not have a reliable coverage source under their plan due to the stipulations from the insurance company. This led to backlash and outrage from homeowners who were paying for a premium that did not cover the predicament that they found themselves in. Obstacles that were later faced by the plethora of insurance agencies that were signed to by residents included a numerous number of plan cancellations and migration to other companies on top of a stain to the company’s name and outreach. This was huge severity in the general area that could have been prevented by both the client and business side of things. Obviously when considering the rate at which these obstacles occur and become an issue can be quite difficult considering the difference in weather patterns over a given time, however we can look at the Gulf of Mexico as a useful tool to determine the rate at which weather pattern variation and events occur. Tornado related events involve obstacles of difficult premium pricing and regulation due to various patterns of events around the Gulf of Mexico. Based on the viewed upon facts that the,” ocean temperatures increase by 2°C–3°C over the 21st century, and surpass reported regional bleaching thresholds by mid-century. Whereas ocean acidification occurs, the rate and size of temperature change outpace and outweigh the impacts of changes in aragonite saturation state,” (Lawman 2022) along with other concerns that were outlined, it is safe to say that the weather should be checked on a high note. Besides from tornados, the effects of a rising sea level could lead to flooding in areas that were not designed for such rapid increases in ocean level. This is yet another factor that shows the ever-growing rate from obstacles such as a rising sea level that insurance agencies must deal with on a day-to-day basis for the protection and management of their clients.
Effects On Pricing
Due to the constant change and surrounding issues that occur in the world today, a constant revaluation of insurance industries and their premiums are very much so necessary to create the perfect plan for the perfect situation. Sometimes this isn’t possible, which often leads to an increase in premiums from the insurance agency so that they are not at a constant loss. An example of this would be an increased monthly premium rate for a driver who has continuous tickets and multiple DUI’s. Secondly, as far as the effect of weather effects on the insurance industry and their pricing, it can often lead to higher premiums due to the variation. “As our changing climate is making storms stronger and more destructive, the Treasury Department has requested that insurance companies provide more pricing data, so they are able to analyze how mate-related disasters are driving up insurance rates around the country.” (Clima Vision 2024)
The size of weather conditions is ever growing and changing, which is often the main reason for the increased premiums as described above. Another way that affects areas for the better has to do with places sanctioned near the east coast like Virginia that sees little to no adverse weather effects compared to other areas of interest. Since Virigina rarely has hurricanes, tornadoes, and severe flooding to deal with, the premiums are often much more affordable given the weather patterns compared to other areas where such effects are far greater and clearer. Lastly, weather patterns can lead to an increase of pricing when considering other companies and businesses involved with the industry themselves. For example, “insurance companies and regulators spread a percentage of the costs over all policyholders. That means rates increase no matter where you live. The New York Times says this will be harder to navigate as climate change gets worse, but for now, it’s how the industry balances the scales.” (Clima Vision 2024) Due to the involvement of other companies, the spread of money between said policy holders, and the effects of weather patterns saw over the years, this leads to a huge effect on the insurance industry pricing market that is often concerning.
Conclusion
It is no question that the effects of weather patterns will continue to change and evolve in the distant future due to the rising sea levels, depletion of the ozone layer, and increase in carbon dioxide related emissions. The discussion about what should be done in response, impact on data, historical experiences that have been learned from, obstacles that invoke high severity, and the effects on insurance pricing should all be taken into effect when considering such a topic. I am informed about such a topic because of diverse weather patterns which have proved to be a problematic event that needs to be taken care of for the benefit of consumers. With the foundation that I have covered today taken into consideration, we can reduce the adverse effects of weather pattern affects from damaging storms.
References
Granda, Lilith. March 13, 2024. 4 Principles for Addressing Climate Risks in the Insurance
Industry. American Progress. https://www.americanprogress.org/article/4-principles-for-addressing-climate-risks-in-the-insurance-industry/
August 19, 2024. Weather Data for Insurance Companies: Everything You Need to Know. Baron
Weather. https://baronweather.com/weather-insights/weather-data-for-insurance-companies-everything-you-need-to-know#:~:text=Weather%20data%20is%20one%20of,understand%20prior%20damage%20to%20properties.
2024. Lasting Lessons from the 2019 Dallas Tornado: The Right Insurer, Right Coverage and
Right Agency Matter. Swingle Collins. https://www.swinglecollins.com/news-insights/the-2019-dallas-tornados-lasting-lessons-the-right-insurer-right-coverage-and-right-agency-matter
Lawman, A. E., Dee, S. G., DeLong, K. L., & Correa, A. M. S. (2022). Rates of future climate
change in the Gulf of Mexico and the Caribbean Sea: Implications for coral reef ecosystems. Journal of Geophysical Research: Bio geosciences, 127, e2022JG006999. https://doi.org/10.1029/2022JG006999
2024. Sever Weather’s Impact on Insurance Companies. Clima Vision.
https://climavision.com/blog/severe-weathers-impact-on-insurance-companies/https://climavision.com/blog/severe-weathers-impact-on-insurance-companies/