Contingency Planning for Climate Change: Drought, Rain, & Fire

Several U.S. government agencies have launched contingency planning to prepare for the effects of climate change—from the Navy studying the threat of rising seas to naval operations to the Department of Agriculture’s planning for possible effects of drought and wildfire on agriculture and livestock to the Department of Transportation’s exploration of risk of high temperatures on highways and bridges. Even some governments of coastal cities, such as those in Florida and Virginia, are trying to make plans to anticipate the effect of rising oceans on their infrastructures.62

But what kinds of contingency planning is being done in private industry for the impact of climate change? Many CEOs of energy, food, and food distribution companies, for example, are reportedly not unduly concerned about the effect of global warming on their businesses.63 But shouldn’t the top managers of insurance companies be?

The Evidence of the Present. “Climate change, once considered an issue for a distant future, has moved firmly into the present,” says the 2014 National Climate Assessment.64 “From Hurricane Sandy’s devastating blow to the Northeast to the protracted drought that hit the Midwest Corn Belt,” pointed out economic writer Eduardo Porter, “natural catastrophes pounded insurers [in 2012], generating $35 billion in privately insured property damage, $11 billion more than the average over the last decade.”65 The insurance industry, he reported, expected the situation to get worse, a view reinforced by a 2014 report by the Intergovern-mental Panel on Climate Change, a United Nations group.66

Anticipating the Worst? Despite the mounting weather-related claims, which included damage by floods and wildfires, a report by Ceres, a Boston-based nonprofit promoting eco-minded business practices, said most U.S. insurance companies, large and small, did not have comprehensive strategies to cope with climate change.67 “Of 184 companies surveyed,” says one account, “only 23 had such strategies, and 13 of those were foreign-owned.”68

However, research by a scientist at the federally funded Lawrence Berkeley National Laboratory, which studied large global insurers, said the industry was stepping up to the challenge, having made 1,148 efforts to adapt and mitigate climate change.69

Whatever the past behavior, the Geneva Association, an international think tank for strategically important insurance and risk management issues, called on insurers to start setting rates “based on climate-modeling scenarios rather than historic trends traditionally employed.”70

YOUR CALL

Based on contingency planning for climate variability and volatility in every part of the globe, what is the responsibility of insurance companies? Just try to avoid catastrophic losses by raising premiums, adding exclusions, and refusing to cover high-risk communities? Or try to educate consumers about building more resilient structures in less risky areas?

Page 173Because the scenarios try to peer far into the future—perhaps five or more years—they are necessarily written in rather general terms. Nevertheless, the great value of contingency planning is that it not only equips an organization to prepare for emergencies and uncertainty, it also gets managers thinking strategically