Most insurance companies aren’t adequately preparing for the challenges of climate change, according to a new report, but they are still well positioned to take the lead on the issue and become vocal advocates in statehouses and on Capitol Hill.

Only 13 percent of insurance companies have a comprehensive strategy around climate change, according to a survey compiled by the National Association of Insurance Commissioners (NAIC) and released by Ceres, a nonprofit group that advocates for sustainability.

Most insurers don’t have any kind of framework to identify trends in climate change and how it is affecting their business, the survey found, and some don’t even acknowledge a difference between climate variability (the year-to-year differences in global weather) and climate change (a fundamental shift in the Earth’s weather patterns).

The issue is touching all facets of the insurance industry, experts said on a conference call with reporters. First, insurance companies are paying out more claims in areas hit by extreme weather events, as in the Northeast in the wake of Hurricane Sandy. They then have to adjust the methods they use to value and underwrite homes or businesses in those areas. They also must prepare for changes in federal or state environmental policy that affect their clients.

“The underlying issue here is that decades of underwriting practices are threatened right now because we are being exposed to a fundamental change and historical precedent is not going to be the guide for what we can expect in the future,” said Washington Insurance Commissioner Mike Kreidler. “Climate change is a significant risk to insurers, both their shareholders and policyholders. The clock is clearly ticking."

2012 might have been a watershed year for insurers and climate change. The industry lost a combined $58 billion due to extreme weather, according to Ceres, mostly as a result from damage due to Sandy. It was also the warmest year on record in the lower 48 states, an indication that extreme weather might become more routine.

As Stateline reported in February, groups like Ceres are therefore pushing insurers to become a more vocal voice in the climate change policy debate. That debate extends from Capitol Hill and federal agencies out to the states and local governments. Three states -- California, New York and Washington -- require insurers that bring in more than $300 million in premiums within their borders to disclose any climate-related risks. Insurance companies could also work with local zoning boards and city planners, experts said, to help mitigate climate risks in individual communities.

“I see the insurance industry becoming much more of an impact player on land use issues and coding,” Kreidler said. “There are some strong standouts around the industry, but there's a lot of room for improvement.”

State and local governments should take an interest not only as policymakers and regulators, but also as stakeholders in publicly traded insurance companies, experts said. Many public pension systems have made investments in insurers, said Jack Ehnes, CEO of the California State Teachers’ Retirement System and a former insurance regulator in Colorado. About $3.8 billion of the teacher pension fund’s $153 billion portfolio is invested in insurers.

If the industry doesn’t reassess its perspective on climate change, then shareholders could eventually take a big hit or they’ll be forced to pull their investment, he said. Either way, it would pay for insurers to the issue seriously.

“These trends have enormous implications for our economy, and that's why we as investors are focused so acutely on this industry,” Ehnes said. “Despite the significant risk that climate change represents, the insurance industry’s response has been well short of what we need.”

The NAIC survey was drawn from paperwork submitted by 184 insurance companies to state regulators in California, New York and Washington. As the survey notes, almost every major insurance company in the United States does business in one of those three states, making it effectively a comprehensive national survey.

Below is the full report.

  Insurers and Climate Change (PDF)
Insurers and Climate Change (Text)