Insurance Analysts Report Pressure to Understate Climate Risks

Five insurance professionals said catastrophe risk analysts routinely face pressure to modify models to understate climate dangers and reduce insurance prices artificially. The professionals said underwriters, brokers and senior staff sought changes even when disaster risks were high. The alleged pressure aims to help brokers and underwriters sell more policies.

A legal opinion shared with the UK's Financial Conduct Authority described the allegations as "exceptionally serious". The opinion said the alleged conduct, if true, would likely constitute significant breaches of financial and prudential regulation. The FCA said the regulator would carefully consider the information supplied, including legal advice based on hypothetical scenarios. The FCA also encouraged people with information about potential wrongdoing to report the information.

Researchers use models to estimate natural catastrophe risks, including hurricanes, fires and floods, when pricing insurance and reinsurance policies. Such policies often cover hundreds of properties or major commercial or infrastructure projects. Analysts interpret model results and estimate coverage risks, influencing policy prices. Four interviewees acknowledged that models require interpretation and that legitimate reasons sometimes justify changing or repeating an analysis. However, those interviewees warned that analysts faced pressure to adjust model inputs or outputs to reach premiums customers would accept despite analysts' concerns. An analyst could, for example, be asked to record flood defences at high-risk properties where no such defences exist.

A junior catastrophe risk modeller at an insurance and reinsurance provider said policies were being priced too low. The junior modeller said colleagues agreed that the team should not modify the figures for the accounts in question in the manner being used. The junior modeller said underwriters asked how to lower estimates considered too high and that more senior staff had overridden limits the modeller tried to impose.

More than two dozen anonymous senior insurance executives issued a warning in an open letter earlier this month compiled by the non-profit Inside Track. The executives said short-term financial incentives were pushing the sector to understate and underprice physical climate risks. The interviewees suggested that such conduct was creating systemic risks throughout the insurance industry. The interviewees also warned that clients could abruptly lose coverage when risks accumulated over years were suddenly judged excessive. A senior reinsurance risk professional reported pressure to manipulate figures and warned that reductions in vulnerable, potentially unprofitable coverage could leave streets or entire areas uninsurable.

Oliver Wing, Fathom's chief scientific and product officer, was not involved in the whistleblowing effort. Wing said industry-wide incentives and pressure favoured optimistic models, but Wing did not consider the modelling to be conducted in bad faith. Wing said climate risk lacked an established benchmark against which a downward adjustment could be measured. Wing argued that model flexibility could produce almost any desired answer and that enormous uncertainty encouraged people to manipulate internal governance processes to maximize business.

A senior professional at one of the world's top five brokers said the professional had also faced pressure to change analysis. The broker professional said some people dismissed models and treated a potential one-in-250-year disaster as unlikely to happen while prioritizing deals and short-term targets. However, the broker professional argued that catastrophe models should prevent surprises merely because a disaster has not previously occurred at a particular location, especially as risk changes.