Climate Change and the Impact on Insurance Underwriting

Traditional insurers must consider the risks of severe natural disaster and weather-related claims when assessing their policies and underwriting. As we experience the effects of global climate change, the scale and frequency of natural disasters such as wildfires, hurricanes, and floods may increase presenting unique challenges that insurers and brokers must take seriously.

Auto dealerships were the recent focus of flooding related claims as Hurricane Florence swept through the Carolinas and wreaked havoc on outdoor car lots. An article by the Associated Press estimated that the hurricane could impact anywhere from 20,000 to 40,000 vehicles and that many dealerships would be unable to run their business for multiple weeks after the flood. Flooding events have caused millions of dollars in damage for auto dealers, according to Burns & Wilcox. “A major component to any dealership coverage is the weather,” said Clay Kadlic, broker at Burns & Wilcox Brokerage, highlighting coastal areas that are at-risk of flooding. “For dealerships that are in low-lying areas, these cars get washed away or salt water basically totals out the car because that salt water eats them apart.”

It isn’t only coastal areas that are under threat. In the middle of the country where hail storms commonly occur, Kadlic has seen one account that had 13 dealership locations across two states, and a location in each state was hit with hail. Each loss was more than 270 cars, which is the equivalent to upwards of $2 million in losses. As these extreme storms become more common, insurers are increasing deductibles and sharing in the losses with the clients.

From the Perspective of an Insured

Open lot insurance can help reduce overall cost by providing comprehensive and collision coverage in addition to physical damage protection for a dealer’s vehicles and equipment. Large franchised dealerships often do not own their cars outright, preferring instead to finance a portion of their inventory with small loans from regional or national lenders. These lenders typically run institutional processes and require that the business obtain some form of weather-related coverage prior to issuing their loan.

Insuring to value and keeping up to date with inventory fluctuations is critical for any auto dealer seeking to mitigate the risk of weather related damage. “Let’s say for instance we agree to insure a particular lot at a particular value, and the inventory on that lot grows over the course of time during the policy term – you can imagine our liability increases with that,” said Rebecca Roberts, associate vice president and managing director at Burns & Wilcox. “The client needs to communicate [inventory] changes to the agent and the insurer, [...] so that there isn’t a co-insurance penalty at the time of loss. This is where an agent can really add value to their client by communicating how all the mechanisms in the policy work so that everyone understands the co-insurance clause and the need to report changes in that inventory.”

While we have highlighted auto dealers here, environmental extremes can disrupt all businesses and should therefore be taken seriously. Insurance providers must take care to understand the environmental threats endemic to their coverage regions, the likelihood of future environmental catastrophe, and the extent of damage historically. While it can be difficult to prevent damage in the event of a weather-related catastrophe, businesses can mitigate losses by selecting a comprehensive insurance policy that covers flooding, fire, and other incidents. Businesses should take care to insure to value and routinely audit their inventory on hand. Limit can help in selecting the right policy as we routinely cover a wide array of insurance markets and product types.

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