Will United Insurance Holdings Corp. be Sunk by Climate Change?
Climate change is one of the top risks facing the insurance industry. With its focus on the coastal regions of the United States, this is especially true for property and casualty insurance holding company, United Insurance Holdings Corp. With the potential for significant amounts of coastal property to be below sea level by the turn of the century – will UIHC be sunk by climate change?
Company Background
United Insurance Holdings Corp. (“UIHC” or the “Company”) is a property and casualty insurance holding company.[1] Founded in Florida in 1999, UIHC is primarily engaged in the homeowners property and casualty insurance business.[2] Although since its founding Florida has remained a significant emphasis for the Company (accounting for just over half of the Company’s policies in-force in 2015), since 2010, UIHC has continued to expand to an additional ten states. During this expansion, the Company has maintained its focus on coastal regions of the United States.[3] In line with this focus, UIHC targets “areas where the perceived threat of natural catastrophe has caused large national insurance carriers to reduce their concentration of policies.”[4] UIHC aims to manage its risk of catastrophic loss through: sophisticated pricing algorithms, policy diversification, and reinsurance participation.[5] The Company believes that its successful record in catastrophe-exposed areas demonstrates a competitive advantage for continued expansion into regions facing similar “perceived” threats.[6]
This logic assumes that UIHC’s historical results accurately predict the Company’s future returns. In fact, on its website, UIHC states that it has “modeled every historical hurricane… over the last 115 years” to justify that its catastrophe reinsurance is robust as it is significant enough to cover damages over any historical period.[7] According to research, however, this is fundamentally flawed. But for significant changes in current emissions patterns, climate change will likely dramatically alter the coastal property landscape.[8] Researchers estimate that by 2050 and 2100 respectively, up to $106 billion and $508 billion worth of existing coastal property may be below sea level nationwide.[9] This could directly, and irreparably, harm UIHC’s business.
Climate Change Guidance
In February 2010, the SEC issued an interpretive release titled Commission Guidance Regarding Disclosure Related to Climate Change.[10] In this release, the SEC referenced a 2008 study performed by Ernst & Young and Oxford Analytica which identified climate change as “the number one risk facing the insurance industry.”[11] This research had prompted the National Association of Insurance Commissioners to require insurance companies to disclose financial risks faced by the insurers related to climate change and the actions that the insurers were taking to mitigate these identified risks.[12] Similarly, this interpretive release was issued to spur management to examine the issue of climate change and assess the anticipated impact on their business.[13]
UIHC Response
Prior to this time, the potential impact of climate change on the Company’s business was ignored in UIHC’s filings.[14] Accordingly, the SEC’s Division of Corporate Finance issued a letter to UIHC requesting that the Company provide “revised risk factor disclosure that addresses the issue of climate change.”[15] The Company appeared to take this guidance seriously in its revision to its 2011 Annual Report adding the following language:
The incidence and severity of weather conditions are largely unpredictable, but the frequency and severity of property claims generally increase when severe weather conditions occur. A body of scientific evidence seems to indicate that climate change may be occurring. Climate change, to the extent that it may affect weather patterns, may cause an increase in the frequency and/or the severity of catastrophic events or severe weather conditions which, in addition to the attendant increase in claims-related costs, may also cause an increase in our reinsurance costs and/or negatively impact our ability to provide homeowners insurance to our policyholders in the future. Governmental entities may also respond to climate change by enacting laws and regulations that may adversely affect our cost of providing homeowners insurance in the future.[16] [emphasis added]
This same language was included in the Company’s 2012, 2013 and 2014 Annual Reports.[17] In 2015, however, when addressing the risk of climate change, the bolded portion of the quote was removed.[18] UIHC’s continued targeting of a region that is particularly susceptible to the impacts of climate change coupled with the removal of this language appears to suggest either a downplaying – or outright rejection – of scientific consensus regarding climate change.
Recommendation
The dramatic impact that climate change may have on UIHC’s business strongly positions the Company to be a significant participant in the global dialogue regarding emissions and the impact that climate change could potentially have on the economy. As explained above, however, if the Company is focusing on this issue, it is not currently highlighted in the information it provides to the public. Instead, UIHC appears to simply be complying with minimum SEC disclosure requirements. Rather than treating the SEC’s requirements as a hurdle, the Company should utilize the guidance of the SEC to more deeply reflect on the susceptibility of its current business model to adverse effects of climate change. In doing so, the Company will have the opportunity to capitalize on the benefits of early adaptations, and move towards open dialogue with customers and investors on the issue. (795 words)
[1] United Insurance Holding Corp. Form 10-K for the fiscal year ended December 31, 2015, page 4.
[2] http://www.upcinsurance.com/about-us/
[3] http://www.upcinsurance.com/about-us/; United Insurance Holding Corp. Form 10-K for the fiscal year ended December 31, 2015, pages 9-10.
[4] United Insurance Holding Corp. Form 10-K for the fiscal year ended December 31, 2015, page 4.
[5] United Insurance Holding Corp. Form 10-K for the fiscal year ended December 31, 2015, pages 4
[6] United Insurance Holding Corp. Form 10-K for the fiscal year ended December 31, 2015, page 4.
[7] http://www.upcinsurance.com/why-upc/
[8] Kate Gordon, “Risky Business: The Economic Risks of Climate Change in the United States,” The Risky Business Project, June 2014, p. 4.
[9] Kate Gordon, “Risky Business: The Economic Risks of Climate Change in the United States,” The Risky Business Project, June 2014, p. 4.
[10] Securities and Exchange Commission 17 CFR Parts 211, 231 and 241, [Release Nos. 33-9106; 34-61469; FR-82], Commission Guidance Regarding Disclosure Related to Climate Change.
[11] Securities and Exchange Commission 17 CFR Parts 211, 231 and 241, [Release Nos. 33-9106; 34-61469; FR-82], Commission Guidance Regarding Disclosure Related to Climate Change, page 5 (citing Strategic business risk 2008 – Insurance, a report prepared by Ernst & Young and Oxford Analytica dated March 12, 2008).
[12] Securities and Exchange Commission 17 CFR Parts 211, 231 and 241, [Release Nos. 33-9106; 34-61469; FR-82], Commission Guidance Regarding Disclosure Related to Climate Change, page 5.
[13] “SEC Guidance on Disclosure Related to Climate Change” Journal of Accountancy Article dated January 1, 2011. See: http://www.journalofaccountancy.com/issues/2011/jan/20103158.html.
[14] United Insurance Holding Corp. Form 10-K for the fiscal year ended December 31, 2010.
[15] Letter from UIHC to Daniel Greenspan and the United States Securities and Exchange Commission Division of Corporate Finance dated September 7, 2011.
[16] United Insurance Holding Corp. Form 10-K for the fiscal year ended December 31, 2011, page 17.
[17] United Insurance Holding Corp. Form 10-K for the fiscal years ended December 31, 2012, 2013 and 2014.
[18] United Insurance Holding Corp. Form 10-K for the fiscal year ended December 31, 2015, page 20.
Thanks for this article. I can see your point that UIHC has consistently insured property in regions that are highly exposed to eventual climate change, in which competitor insurance companies have decided to retreat. This could certainly indicate that UIHC is plainly ignoring climate change consequences and, hence, taking on far more risk than reasonable.
However, let me present an alternative and more cynical interpretation. What if UIHC is perfectly aware of climate change’s risks? What if that is the exact reason why they are investing in high-risk regions? What if current corporate incentives favor this kind of risk? Let me explain.
I would imagine that homeowners in high-risk areas would find it increasingly harder to insure their homes. Insurance companies would either deny coverage in this areas, or charge prohibitive rates. That, until they find a provider that is willing to insure at competitive rates. I would imagine that, because of this reason, UIHC would quickly become a market leader and grow at astronomical rates. As long as no major climate disaster occur, this would mean tremendous profits to UIHC, which could be distributed to owners as dividends. Once the dividends are paid, that money is gone. If at some point things turn sour, and a major climatic event happens, UIHC would simply go bankrupt. Can someone really sue them for fraud? Can someone really know what the real risk was? Maybe they did their best risk-assessment effort, but just failed to estimate very difficult to know parameters.
Janick and KC– interesting topic. I also wrote about Florida home insurance. I believe that UIHC helps the competitiveness of Florida’s insurance market. Citizens Insurance (a Florida government owned entity) is one of the largest property insurers in Florida. It was formed as a last-resort property insurer when homeowners can’t get any private insurance (due to perceived riskiness of their coastal homes). Citizens was once the largest state property insurer, insuring $137 billion of residential property, which poses a risk to all Floridians because all Floridians are responsible for Citizens if Citizens incurs a cash deficit due to payouts from a large natural disaster. By UIHC coming into the insurance market and offering insurance to more homeowners, it effectively derisks property insurance from the public sphere to the private market.
Janick– I understand your point if UIHC went bankrupt and was bailed out by the US or another organization after having taken dividend from past profit. However, I think there are insurance companies for insurance companies? That’s a potential backstop to the problem you suggested.
Lastly, I’m unclear on UIHC’s business strategy. Is it reaping financial benefits from Citizen’s “depopulation” initiative, a program which attempts to reduce the number of policy holders covered by Citizens? Is it cherry picking the best risk-adjusted homes from Citizen’s portfolio, leaving Citizens with a portfolio of risky assets? Is UIHC perceived to be helping Citizens by taking more policies, but actually making Citizens more susceptible to bankruptcy and therefore the Florida public?