Environmental Risk and Insurance

Understanding the impact of environmental risks on insurance risks is becoming more crucial for actuaries Margaret Conroy

Photo: iStock.com/clu

The headlines get our attention: “What could happen once earth’s tropical rain belt shifts?” “Heavy rains flood roads, loosen rocks, landslides;” “Hurricane-force winds kick up new wildfires; hundreds of thousands still without power.” We hear about environmental changes in our daily news. The Arctic National Wildlife Refuge is now open for drilling. Once in 500-year floods are occurring once a decade. More named tropical storms than ever are materializing. Wildfires are burning thousands of acres. Pollutants are found in drinking water in major cities. As insurance professionals, are we fully considering how these ever-increasing environmental changes are affecting our work?

Environmental issues and risks impact our employers and clients in myriad ways. Losses from natural disasters are accelerating. Pollution and environmental degradation adversely affect mortality and morbidity rates and health care costs. Environmental change affects risks we may not yet understand. At the same time, the actuarial profession and our stakeholders in the insurance industry are in a unique position to help quantify and mitigate environmental risks via pricing and benefit incentives.

Despite the risks posed by environmental issues to actuaries and our stakeholders, and despite the opportunities for actuaries and our stakeholders to address environmental risks, actuarial literature is limited with respect to environmental risk. The Society of Actuaries (SOA) Catastrophe & Climate Strategic Research Program Steering Committee realized a need for additional education on environmental risks—that may not be widely understood by the actuarial community—and commissioned a series of articles to address that need. The series began publication in November 2020 and will continue with approximately one article a month for a total of 12 articles. Articles currently available include:

The series isn’t intended to cover the stereotypical “environmental risk” associated with legacy pollution claims or the environmental impairment or environmental protection liability policies that cover specific risks. Instead, this series highlights risks of which you may not be aware. For example, how many of these 18 facts do you know?

  1. An increase of air pollution particulate matter of only 1 microgram per cubic meter is associated with a 15 percent increase in COVID-19 fatalities. A team of biostatistics researchers at Harvard found this correlation between long-term exposure to fine particulate matter and county-level death rates from COVID 19. 1,2 May affect health, life and workers’ compensation.
  2. As of 2014, antibiotic-resistant infections cost more than $2.2 billion annually in the United States, and the cost has been steadily growing. Antibiotic-resistant infections are a global health care concern. They stem from evolution of bacteria mainly in response to use/overuse of antibiotics. The Centers for Disease Control and Prevention (CDC) estimates 23,000 Americans die each year from these infections. These infections add to the cost of health care ($1,383 per patient).3 Could insurance industry pressure on antibiotic use help alleviate the problem? May affect health, life and workers’ compensation.
  3. A 20-pound rodent chewing on the roots of marsh plants causes billions of dollars in damages via hurricanes when the destroyed wetlands are unable to dampen storm surges as healthy wetlands would have done. Nutria are most populous along the Gulf Coast, Chesapeake Bay, Pacific Northwest and California. They are wasteful feeders and destroy 10 times more than they eat. Each female can birth up to 200 young in a year. When they eat roots of plants holding wetlands together, the soil washes away and the wetlands turn to open water. For every mile of coastal wetlands lost, storm surges increase one foot on average.4 May affect flood, property, life and casualty.
  4. Tiny invasive ants cause billions of dollars in damage, and increased flooding due to climate change is assisting them in conquering new areas. Red fire ants damage crops and attack animals and humans in large numbers. During floods they build rafts out of their bodies, taking turns being under and above the water line. The rafts can float for miles, helping the ants to conquer new territory.5,6 May affect crop, farmowners, property, health and life.
  5. Methods devised by foresters to increase production are now leading to increased forest fire damage and fire risk. Planting rows of similarly aged trees allows for quick-spreading canopy fires known as crown fires.7 May affect property, life and casualty.
  6. There are invasive fish in the United States that can jump as high as 10 feet out of the water and cause fatalities to boaters via collision. Asian carp in the Mississippi River system destroy fisheries by eating and outcompeting native fish.8 May affect watercraft, liability (possibly for fishing guides), health and life.
  7. Though mussels can be delicious and beneficially filter and clarify water, if the wrong species are introduced to certain areas, they can grow unimpeded and cause billions of dollars in damage to infrastructure and affect health and business interruption insurance. Zebra and Quagga mussels in the United States have been known to occur in densities as high as 750,000 per square meter, fouling substrates, clogging waterpipes and causing shutdowns in industry. They also increase water clarity, accelerating the growth of toxic algae that contaminates the water so it is harmful to touch or inhale.9 May affect business interruption, watercraft, inland marine, property and health.
  8. Microplastics accumulate pollutants, heavy metals and pathogens and carry them into our bodies across cells into all organs. Microplastics (small plastic particles) are hydrophobic and thus can adsorb and concentrate hydrophobic organic contaminants, such as polycyclic aromatic hydrocarbons (PAHs), organochlorine pesticides and polychlorinated biphenyls (PCBs) to a high degree and accumulate heavy metals such as cadmium, zinc, nickel and lead. Microplastic particles can translocate across living cells to the lymphatic and/or circulatory system. They impact the health of cells and the immune system and accumulate in organs.10,11 May affect general liability, products, health and life.
  9. Even though Lyme disease is spread by deer ticks that live in the forest, living near larger forest areas actually lowers the risk of catching Lyme disease. Forest patches that are less than two hectares in area present an elevated risk of Lyme disease. The ticks that bite humans must bite an infected animal first. White-footed mice are the most common reservoir of Lyme. Larger forest areas have more diverse mammals and a lower percentage of those mammals are white-footed mice, making it less likely that the tick nymphs will first bite a white-footed mouse. Tick nymphs also live in higher densities in small forest patches.12 May affect health.
  10. Coarse air pollution particles can be carried a distance of up to 4 km, and fine ones can cross an ocean on the air currents. Air pollution, which negatively affects health, can be influenced by distant actions.13 May affect health, life and liability.
  11. Electromagnetic interferences from wind turbines can cause errors in navigational systems. They can also disrupt the modulation in typical microwaves that are used for communication, radar and to control remote machinery.14 May affect liability, workers’ compensation, property and products.
  12. Increased ocean acidity due to higher atmospheric CO2 levels leads to increased coastal destruction during storms. High CO2 causes tangible damage. Much of the increased CO2 is absorbed by the ocean, which increases ocean acidity and makes it more difficult for calcium-based shells or skeletons to form. The decrease in coral reefs allows higher waves and storm surge during storms, increasing damages to coastal structures and infrastructure.15 May affect property, life and casualty.
  13. Rooftop solar panels generate electricity from the light of a building fire and can be an added risk to firefighters because they can cause electric shock as well as make it difficult to maneuver. Most solar panels cannot be turned off.16 May affect workers’ compensation and property.
  14. A 10 percent increase in wind speed results in 50–60 percent more damage when winds rise above 100 km-per-hour. That is according to Pete Dailey of RMS. As wind speeds during hurricanes increase, damage does not increase linearly.17 May affect property and casualty.
  15. Lack of extreme cold from climate change may be as much of a problem as increased heat. Lack of extreme cold poses risk by preventing the winter die-off while increasing the reproduction of pests, especially insectan pests. Some of these cause indirect damage to human health by increasing flammability in forests leading to more, larger or hotter fires; causing crop damage; or by increasing the number of disease vectors spreading mosquito and tick-borne illnesses such as West Nile virus, Lyme, malaria, Zika and so on. Lack of extreme cold also can increase flooding in northern areas with thawing permafrost.18 May affect property, life and health.
  16. Hurricane Harvey caused such heavy flooding that a concrete cap covering the San Jacinto Superfund site waste pit was undermined, causing toxic dioxins to wash downriver and triggering another round of cleanup. Cleanup may not have anticipated the increased volatility of weather and increased power of storms that is occurring with climate change. The Government Accountability Office warned in a 2019 report that there are 945 Superfund sites across the United States vulnerable to hurricanes, flooding, sea-level rise, increased precipitation or wildfires—all of which are intensifying with climate change.19 May affect commercial liability.
  17. Methodologies of attributing and tracing emissions related to climate change to particular carbon producers are increasingly possible and accurate. Some researchers have traced emissions related to temperature rise to the 90 largest carbon producers, while others have identified the contribution of the largest carbon producers to ocean acidification and related risks.20 May affect commercial liability.
  18. Investments in companies that rank highly on various indicators of sustainability have been outperforming standard indicators. This has implications for the asset side of the balance sheet and for investment income.21

The complete series of articles by the SOA Catastrophe & Climate Strategic Research Program Steering Committee will address a large variety of topics that will not only shed light on the concerns identified in this article, but also will provide fundamental information for actuaries, allowing them to consider these risks in the course of their work. The series will include introductory articles on environmental risks and climate change and cover other fundamental topics, such as climate models, sustainability, effects of environmental degradation (including pollution) on morbidity and mortality rates and health care costs, crop risk, environmental risk effect on municipalities, and health risk from changing species distributions and seasonality. The articles will provide an overview of existing research into the selected topics with a focus on the relevance of the topic to actuarial practice.

Margaret Conroy, Ph.D., FCAS, MAAA, is both an actuary and an ecologist. She is principal at Analytic Solutions, LLC, a company specializing in actuarial, natural resources and environmental risk consulting.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

Copyright © 2021 by the Society of Actuaries, Chicago, Illinois.