Your Fiscal Forecast: Another Brewing Crisis

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Hurricane season has already hit many of us hard. Last week's Hurricane Irene caused damage, disruption, and tragically, deaths. Although early estimates put insurers only the hook for only about $3 billion in losses related to Irene's fury, damage from future extreme weather could still leave insurers soaked.

According to a new report from Ceres, a coalition of investors, environmental organizations, and public interest groups, insurers are woefully unprepared for the adverse effects of climate change. Ignoring real risks in the banking industry led us into the financial crisis. If insurers dismiss the similarly looming danger that human activity could help spawn bigger, more destructive natural disasters, their industry could face a similar calamity.

Disastrous disillusionment
After reviewing disclosure data from 88 insurance companies, to assess how deeply the U.S. insurance industry recognizes climate change as an important risk factor, Ceres calls the results "illuminating and disillusioning."

Only 11 of the 88 insurance companies Ceres surveyed reported having formal climate change policies. More than 60% of the respondents admitted that they lacked a dedicated climate risk assessment approach. This is shocking, since more than three-quarters of the insurance companies specify negative outcomes attributable to climate change.

Out of 18 property and casualty companies, exactly zero have outlined formal climate change policies, or conducted any explicit board or executive oversight of the issue.

In life insurance, Prudential's (NYS: PRU) and Genworth Financial's (NYS: GNW) insurance arms were the only survey respondents reporting formal climate policies. The remaining 11 companies with such initiatives included ACE (NYS: ACE) and AIG's (NYS: AIG) Chartis subsidiary.

That doesn't mean that insurers are all completely blind to the possible negative ramifications of climate change. Allstate (NYS: ALL) has actually come out and said that the recent upswing in severe weather indicates permanent climate change.

Using disclosure to head off disaster
Ceres points out that the insurance industry is a major part of the economy, given its $23 trillion in global investments. In the report's introduction, Ceres President Mindy Lubber states, "There's irony in issuing a warning of unseen risk to an industry literally built on assessing, modeling, and mitigating risk."

Indeed. More severe weather and climate changes could cause terrible ripple effects across individuals, industries, and economies. An insurance industry caught by surprise could take one of the hardest hits. I'm sure none of us have any desire to see another "ironic" crisis befall the companies that should have seen it coming.

Ceres' major recommendation is that all states mandate the National Association of Insurance Commissioners' climate change disclosure form for insurers, and make that data public.

Disclosure is a beautiful, illuminating thing. Perhaps if we better expose its failure to adequately address hidden but pressing dangers, the insurance industry will step up its efforts to formulate real plans of action before it's too late. As dreadful storms brew, let's hope everybody's well prepared to weather any crisis.

At the time this article was published Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.Alyce Lomaxdoes not own shares of any of the companies mentioned. The Motley Fool owns shares of AIG. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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