For insurance companies, sometimes it’s “out of sight, out of mind” when it comes to managing for climate change.
A new University of Iowa study finds that insurance companies are more likely to strengthen their climate change risk management strategies when a natural catastrophe hits the state where it’s headquartered. But if the catastrophe hits a few states over, companies are less likely to change their climate change strategies, even if it’s a market where they have lots of policyholders.
“Firms seem to invest in better processes and take it more seriously if it happens in their own backyard,” said Thomas Berry-Stoelzle, associate professor of finance at the Tippie College of Business and study co-author. “You’d think they would be more likely to take those steps if something hits the parts of the country where they sell the most policies, but that doesn’t seem to be the case.”
The researchers analyzed climate risk disclosure documents property casualty insurance companies file with state insurance commissioners each year, showing what the companies do to better manage the risk of disasters caused by climate change. They compared that to a database of natural disasters that hit the United States between 2012 and 2020 and found companies were more likely to improve their climate change risk management quality after storms hit their home state than storms that hit another state.
Why? Berry-Stoelzle said it’s an example of personal bias and salience, the idea that we’re more likely to respond to things that personally and more immediately affect us. The insurance company CEO whose roof was blown off by a tornado, for instance, is more likely to conclude their company needs to better address climate change risk than if the CEO only saw something on the news.
As a warming planet causes more frequent and more damaging storms, insurance companies will increasingly be on the hook for payouts that will eat into their profits. Addressing the quality of their climate change strategies will help firms to manage their payouts while staying in business.
“Their reports are very detailed and show many of them take climate change seriously,” Berry-Stoelzle said.
