Climate Change, Policy Language, Changing Risk Conditions, and Captives

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Recently, several articles have highlighted the impact of climate change on property coverage.

Let's start with this piece from the Washington Post that highlights how rising sea levels are effecting housing in the Charleston area.  

Elizabeth Boineau’s 1939 Colonial sits a block and a half from the Ashley River in a sought-after neighborhood of ancient live oaks, charming gardens and historic homes. A year ago, she thought she could sell it for nearly $1 million. But after dropping the price 11 times, Boineau has decided to tear it down.

In March, the city’s Board of Architectural Review approved the demolition — a decision not taken lightly in Charleston’s historic district.

“Each time that I was just finishing up paying off the bills, another flood would hit,” Boineau said.

If insurers follow their standard mode of operating, we'll see premium increases or an exodus of insurers underwriting property risk in coastal area -- which would hit a lot of cities.  There's also the possibility of increased litigation as policy-holders attempt to force insurers to cover certain risks.

And then we have this from Axios, which highlights how climate change is highlighting coverage gaps in property policies:

The big picture: Research shows that the world’s cities can expect on average $320 billion in lost economic productivity each year because of climate-related risks — climate change, floods, droughts, wild fires and heat-island effect, among others. Meanwhile, because more than 60% of these direct and indirect costs are not typically covered by insurance, insurers and public finance are in retreat as suppliers of last resort. For example, 60% of FEMA claims in Puerto Rico have been denied. Even against predictable threats like floods, earthquakes and wildfires, the protection gap is massive.

This reminds me of the mold situation in Texas, which led to a large increase in litigation in the late 1990s.

And finally, we have this from CBS:

As the nation plans new defenses against the more powerful storms and higher tides expected from climate change, one project stands out: an ambitious proposal to build a nearly 60-mile "spine" of concrete seawalls, earthen barriers, floating gates and steel levees on the Texas Gulf Coast.

Like other oceanfront projects, this one would protect homes, delicate ecosystems and vital infrastructure, but it also has another priority: to shield some of the crown jewels of the petroleum industry, which is blamed for contributing to global warming and now wants the federal government to build safeguards against the consequences of it.

The plan is focused on a stretch of coastline that runs from the Louisiana border to industrial enclaves south of Houston that are home to one of the world's largest concentrations of petrochemical facilities, including most of Texas' 30 refineries, which represent 30 percent of the nation's refining capacity.

Texas is seeking at least $12 billion for the full coastal spine, with nearly all of it coming from public funds. Last month, the government fast-tracked an initial $3.9 billion for three separate, smaller storm barrier projects that would specifically protect oil facilities.

This tells us that companies are already trying to mitigate future damage from rising sea levels.

How can a captive help?  Several ways.

1.) A captive can underwrite large deductibles for property policies, putting the insured in control of the first layer of risk and the claims process.

2.) A captive allows the insured to write the insurance policy, giving him maximum control over what is covered along with the triggering mechanism for the coverage.