Property insurers tighten coverage as climate change continues

Climate-driven events are prompting changes in commercial property insurance policy wordings and tighter terms and conditions as insurers try to manage an increase in the frequency and severity of natural catastrophe losses, brokers say. 

How policies define change in temperature and how deductibles and limits are applied are some of the areas where commercial property policyholders are seeing changes, they say. 

Global insured natural catastrophe losses totaled $40 billion in the first half of 2021, according to a report published last week by Swiss Re Institute, part of Swiss Re Ltd. 

Winter storm Uri, which hit swaths of the United States in February, caused estimated insured losses of $15 billion, the highest ever recorded for this peril in the U.S., and accounted for about 38% of all estimated insured losses from natural catastrophes in the first half of the year, Swiss Re said. 

Weather-related events — not just one-off events — are becoming more frequent and severe, and there’s a push by insurers to continue to clarify and enforce language, said Martha Bane, Glendale, California-based managing director of the North America property practice at Arthur J. Gallagher & Co. 

For hail/convective storm losses, in the past two to three years insurers have pushed actual cash value on building roofs, Ms. Bane said. “That means a much lower claim payout for the insured,” she said. Insurers have also introduced “very scientific ways” of detecting pre-existing damage, she said. 

Deductibles in commercial property policies have changed significantly. It’s almost standard in hail-prone areas for policies now to have a percent deductible for the exposure “whereas in the past the standard all other perils deductible applied,” she said.  

In the wake of winter storm Uri, which knocked out power for numerous people and companies in Texas, change in temperature language has also been added to policies to clarify what coverage insurers intend to provide, Ms. Bane said. 

Insurers are moving to refine and restrict coverage following the freeze event in February, said Brian Dove, USI Insurance Services LLC’s national real estate practice leader, based in Dallas. 

“There are going to be some changes in policy language as it relates to that type of event, because the application of some of the carrier forms is not what clients expected, so there were some shortfalls there,” Mr. Dove said. 

One of the questions is around the term “change in temperature,” he said. “We haven’t seen the final version of where we’ll land but there will be changes in the policy language as it relates to that type of event,” he said. 

Deductibles for earthquake, flood, named storm and wind/hail have also changed increasing retentions for policyholders, Mr. Dove said. And insurers have reduced capacity for wildfire risks, he said. 

Joseph Jonas, product manager, commercial lines, at the American Association of Insurance Services, an insurance statistics and advisory organization in Lisle, Illinois, said there is not necessarily a shift by insurers to standardize language as it relates to extreme weather events and climate change. 

But recent events have led to a shift in how the industry approaches extreme weather events, whether that’s insurers developing new coverages, the way insurance departments look at new filings, catastrophe modeling or adjudication of claims, he said. 

Superstorm Sandy in 2012 brought to light inadequacies in policy language and/or policy offerings, for example, Mr. Jonas said. 

Insurers are requesting a lot more information from catastrophe modelers with respect to climate change, in part because external stakeholders, such as regulators and rating agencies, are seeking more information from insurers, said Karen Clark, president and CEO of Karen Clark & Co. 

“Insurers want to make sure the cat models are accounting for climate change to the extent possible,” she said. 

In California, regulators are paying closer attention to climate change with respect to wildfire hazard, for example. They want to “understand the models better and how they are capturing this information,” Ms. Clark said. Regulators want to be sure mitigation steps taken by property owners and communities, such as pruning and clearing brush, are incorporated into the models and reflected in the rates charged, she said. 

Wildfire is the modeled peril that has the highest percentage impact of climate change, followed by floods and hurricanes and then severe convective storms, Ms. Clark said. 

The Intergovernmental Panel on Climate Change said in its latest report, published Aug. 9, that “It is unequivocal that human influence has warmed the atmosphere, ocean and land.” The report warned that temperatures are likely to rise by more than 1.5 degrees Celsius over the next 20 years, bringing widespread extreme weather.