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‘Rough ride’: 5 CFO tips for cutting insurance costs amid climate change

Tornadoes, floods, hurricanes and other calamities whipped up by climate change are upending a cornerstone for CFO risk management.

The cost of commercial property insurance in the US has surged, increasing 15% last year in the biggest jump in more than three decades, the Insurance Information Institute said. During the first six months of 2023, the cost of commercial property claims ballooned 30%according to the Swiss Re Institute.

Severe weather has created “certainly the most challenging property market we’ve seen probably since 9/11,” according to Brandon Thompson, senior vice president for risk management at Transwestern, a Houston-based commercial real estate company. “We’re in for a rough ride for the next couple of years.”

CFOs face a seller’s market for commercial property insurance as carriers push up premiums and pull back from high-risk areas, Thompson said in an interview. “You can’t just walk down the street any more and pick up an insurer.”

The turbulence from global warming puts pressure on CFOs and chief risk officers to precisely gauge company vulnerabilities and minimize insurance costs, according to experts in risk management. Solutions range from closer partnerships with insurers and hardening buildings against damage to use of new insurance structures and advanced data analytics.

“If you hold on to your old ways, you’re not going to be able to move forward,” said Zaheer Hooda, head of North America for Cytora, a London-based InsurTech firm.

The frequency of calamities induced by climate change shows no sign of falling.

Through early November this year, the US suffered 25 weather-related disasters, each causing at least $1 billion in damage, according to the National Oceanic and Atmospheric Administration. From 1980 until 2022, the country annually faced just eight such disasters on average, adjusted for inflation.

Disasters causing more than $1B in damage increase

Number of disasters causing more than a $1 billion in damage, CPI adjusted, from 1980 until Nov. 8, 2023.

A $1-trillion-dollar catastrophe currently strikes the US on average every three weeks compared with every four months during the 1980s, NOAA said this month in the US National Climate Assessment, citing inflation-adjusted data.

The footprint from destruction is growing. So called convective storms of heavy rain, lightning, hail and violent wind spread further north this year into Great Lakes states, expanding the range of vulnerability for insurers and businesses alike.

During the first half of 2023, convective storms caused $34 billion in insured damage in the US — a record for a six-month period and 68% of insured natural catastrophe losses worldwide, according to Swiss Re.

Average annual total cost rises for disasters exceeding $1B

Average annual total cost of $1 billion dollar disaster events during five-year periods from 1984 until Nov. 8, 2023, CPI adjusted.

When calibrating their exposure to potential losses, insurers have long balanced the risk of policies written in damage-prone coastal states such as Florida and California with those in less vulnerable areas of the US heartland.

“That’s no longer as effective with convective storm losses growing so much in the middle of the country,” Thompson said.

During the past 10 years rocketing costs to insurers from extreme weather have outpaced the rise in labor and construction materials costs from inflation — even after accounting for the high price pressures beginning in late 2021.

So-called claim severity, or the average cost of an insurance claim, has soared 150% during the past decade, or about six times faster than inflation, according to David Hemry, director of commercial strategy at Lexis-Nexis Risk Solutions.

Facing losses from severe weather, several insurers are running for cover.

State Farm, one of several carriers pulling back from California, announced in May it will stop accepting new applications for commercial and personal property insurance in the Golden State. Nationwide announced in June unspecified risk reduction in its small- and middle-market commercial property insurance in unidentified states.

Hail in recent years has hammered several regions, especially along the Interstate 35 corridor in Texas and in Denver and other parts of Colorado, Hemry said in an interview. Carriers that for years could accurately predict claims in many areas can no longer do so.

“Insurers in Arkansas, Illinois, Kentucky and Indiana are in a particularly unstable situation,” Demex Group CEO Bill Clark said in an email response to questions.

Meanwhile, reinsurers — the providers of lifeblood financing to insurers — are pulling back. They have hiked premiums from 30% to 50% across the US this year for insurers with catastrophic losses, according to an order signed by California Governor Gavin Newsom in September aimed at strengthening the state’s private insurance market.

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