Risky Business: Climate Threats Bring Change to Insurance and Finance Sectors

Duke symposium launches public-private research effort on managing climate risks

As the effects of climate change intensify, the insurance and finance sectors in the United States must adapt to help communities build resilience to catastrophic weather events and chronic threats, such as coastal erosion and extreme heat.

That was among the key messages from expert speakers during the public kickoff of the “Risk Science for Climate Resilience” symposium, which drew a standing-room only crowd of nearly 100 on Feb. 15. The two-day convening was organized by Duke RESILE and the Nicholas Institute for Energy, Environment & Sustainability.

“The insurance and finance sectors are well positioned to play a central role in managing climate risks,” said symposium organizer Mark Borsuk, James L. and Elizabeth M. Vincent Professor of Civil and Environmental Engineering and the faculty director of RESILE. “These industries are unique in their ability to assess and price risk, allocate capital, offer financial protection and influence risk-related behavior.”

Duke Climate Leader in Residence Francis Bouchard introduced keynote speaker Frank Nutter (pictured) as “undoubtably the longest and loudest voice from the insurance industry on climate that there is.”

The insurance sector, which was the focus of much of the conversation, has traditionally acted as a “canary in a coal mine” to signal risk in specific areas. Successfully filling that role in the face of climate change requires re-examination of the actuarial approach that the industry and regulatory system follow today, suggested Frank Nutter, who served as president of the Reinsurance Association of America for more than three decades.

“It’s like driving a car by looking in the rear-view mirror — it’s built on historical loss information trended forward primarily using economic factors,” said Nutter, who delivered the keynote presentation. “This works if the loss costs are linear or cyclical, but that’s not the environment we’re in for property insurance, particularly in high-risk areas.”

Another key challenge is the way that the insurance sector incentivizes behavior. Insurers are “incredibly effective” at doing this on an individual level through policy language, discounts and other mechanisms, explained Francis Bouchard, managing director at Marsh McLennan and Duke’s first Climate Leader in Residence. However, climate change poses risks at a community level.

“[As an individual] you're not going to go out and build a seawall or a nature-based solution,” Bouchard said. “So the signals we're sending are actually incompatible with the solutions that are needed.”

As the industry grapples with how to respond, property owners are seeing their insurance premiums spike. Quoting from a recent Financial Times article, Bouchard likened the price hikes to the world’s first consumer carbon tax. In particularly vulnerable communities, that’s starting to prompt difficult discussions.

“There's a real question of what people should do when they receive these price signals,” said Allison DeJong, a planner with The Water Institute. “Because they don't want to go anywhere—it's their community. And we know in the research that community is not a ‘nice-to-have.’ It is absolutely necessary for survival.”

In his keynote presentation, Nutter laid out a series of recommendations for Congress and federal agencies to proactively address these challenges. Potential solutions included expanding funding for weather and risk assessment, removing federal income taxes on mitigation grants, incentivizing states to update building codes and increasing funding for relocating people in high-risk areas.

Nutter also shared his thoughts on how insurers can remain relevant in the face of climate risks. Community-based financial products for “community-sized problems” could be one direction. Insurance companies also have a clear incentive to invest in resilience projects, although some regulatory barriers would need to be overcome.

“Resilience is not simply rebuilding roads or rebuilding people’s houses — it’s rebuilding the fabric of these communities,” he said.

The public conversation fed into a private workshop on Feb. 16 for nearly 50 Duke scholars and invited guests. Workshop participants strategized about how Duke could utilize its strengths and partnerships to stimulate novel approaches to climate risk in the private sector and scale up climate resilience efforts.

The event marked the start of the Duke Climate Collaboration Symposia series, which will help identify opportunities for Duke University to make the most of its interdisciplinary expertise and convening power for meaningful impact on climate challenges. The series is funded by a gift from The Duke Endowment in support of the Duke Climate Commitment, which unites the university’s education, research, operations and public service missions to address the climate crisis.

The event also served as the launch of RESILE, a new university-wide climate research initiative based in Duke’s Pratt School of Engineering. RESILE integrates data science and modeling, risk assessment and decision theory, and economic and policy analysis to advance approaches for addressing climate risk.

RESILE brings together Duke’s rare mix of highly regarded schools and its dedication to serving society to create innovations across the insurance, finance and infrastructure sectors that align products and practices with the scope and scale of climate change. It aims to advance solutions at a systems level that not only provide financial protection in times of crisis, but also incentivize societal risk reduction, safeguard vulnerable communities and catalyze the development and deployment of climate solutions by other sectors.

The research questions discussed at the Feb. 16 workshop will help inform RESILE’s leadership as they compete for a federally funded Industry-University Cooperative Research Center focused on climate modeling and risk assessment. If successful, RESILE will become part of a larger center with the University of Georgia and a consortium of insurance and financial sector partners.