We are today confronted with the devastating effects of climate change, which are playing out all around us at an increasingly rapid pace. When we consider the impact of businesses on these events, we tend to think about companies whose business practices may have – indirectly or directly – played a role in precipitating them. But what about the businesses that have to bear the costs?
Farmers Insurance Group is one of the largest insurers of vehicles, homes, and small businesses in the US, serving upwards of 10 million households across all 50 states. When Hurricane Rita hit Beaumont, Texas in 2005, Farmers contributed $100,000 for an emergency operations center, sending insurance adjusters to the scene to assess the damage and expedite the reconstruction effort. Afterwards, Farmers made a commitment to disaster recovery, and a proud promise to provide rapid assistance to settle customers’ claims.
It is unlikely that Farmers’ management team understood the magnitude of this promise at the time, or how dramatically disaster recovery would impact the business going forward. In the US, average temperature has now risen by 1.9 degrees Fahrenheit, precipitating more extreme weather events than ever before; whereas they once occurred sporadically, these catastrophic events are now commonplace. For instance, whereas minor coastal flooding occurred less than once a year in the 1950s, it now occurs once every three months, on average. Data from the World Bank indicates that weather-related losses have risen from an annual average of about $50bn in the 1980s to close to $200bn today. In the US, it’s companies like Farmers that stand to pay the price.
But are insurance companies really responsible for the costs of climate change? In 2013, Farmers didn’t think so. After a storm ravaged the homes of its customers in Illinois, Farmers sued Chicago-area municipal governments; its lawsuit claimed that the local government was aware of inadequacies in its drainage systems, yet failed put preventative measures in place despite climate related threats. In Farmers’ view, an insurance industry analyst told NPR, insurers are in the business of covering unforeseen risks: “But we’re now at the point with science where climate change is a foreseeable risk.” Farmers subsequently dropped the lawsuit, but the questions it raised still linger.
While Farmers continues to focus on disaster relief, it has not addressed climate change head on. Farmers still responds to extreme weather events; the company has created a “Disaster Recovery Playbook,” a standardized, adaptable model for disaster relief. Farmers encourages its employees to volunteer their time to rebuild ravaged communities and provides funding to the Red Cross for disaster relief efforts. These initiatives are fine, but they do not come close to truly moving the needle. There is much more Farmers can do to address climate change.
In fact, insurance companies like Farmers are in a unique position to incite behavioral change on the organizational and the individual level. For instance, insurers could offer discounts to businesses that divest from harmful carbon emissions, or to motorists that operate hybrid or electric cars. The company could forge partnerships with scientists and other players to facilitate more accurate prediction and prevention of catastrophes; it could come together with local governments to enact policies that encourage safer building practices and materials, fulfilling a mutual interest in creating more disaster resilient communities. Farmers could even do things like purchase at-risk businesses rather than insuring them: the business owner would pocket cash today and continue to run the business free of worry and risk; Farmers would earn on the value and income of the property until the end of its useful life.
More generally, there is an argument to be made that companies like Farmers should proactively quantify the risk that climate change poses. While such prominent businesspeople as Warren Buffet still claim that climate change has neither resulted in “more frequent nor more costly… weather events covered by insurance,” others, like Bank of England Governor Mark Carney, are urging companies to take responsibility for measuring potential losses. Organizations like the World Bank call for countries and business to put a price on carbon emissions; couldn’t Farmers and others start a movement calling for insurance companies to put a price on climate change?
Back in 1928, Farmers was founded to insure the vehicles of rural farmers. “But as the world changed,” its company history states, “so did we.” Today, the face of our planet is changing more rapidly than ever before. Whether Farmers can keep up remains to be seen.
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Global Change website, www.globalchange.gov
Smarter Safer website, smartersafer.org
Smarter Safer, Bracing for the Storm: How To Reform U.S. Disaster Policy To Prepare For A Riskier Future, SmarterSafer (2015), http://www.smartersafer.org/wp-content/uploads/Bracing-for-the-Storm.pdf
“Damages From Extreme Weather Mount As Climate Warms,” http://www.worldbank.org/en/news/press-release/2013/11/18/damages-extreme-weather-mount-climate-warms
D. Weissmann, “Who will pay for climate change? Not us, insurer says,” Marketplace (May 2014), http://www.marketplace.org/2014/05/14/sustainability/who-will-pay-climate-change-not-us-insurer-says
K. Alexander, S. Nasiripour, B. Walsh, “Warren Buffett is Wrong About Climate Change,” Huffington Post (2016), http://www.huffingtonpost.com/entry/warren-buffett-climate-change_us_56d36cade4b03260bf773563