{"id":10869,"date":"2016-11-04T02:06:58","date_gmt":"2016-11-04T06:06:58","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/united-insurance-holdings-corp-sunk-by-climate-change\/"},"modified":"2016-11-04T15:37:57","modified_gmt":"2016-11-04T19:37:57","slug":"will-united-insurance-holdings-corp-be-sunk-by-climate-change","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/will-united-insurance-holdings-corp-be-sunk-by-climate-change\/","title":{"rendered":"Will United Insurance Holdings Corp. be Sunk by Climate Change?"},"content":{"rendered":"

Company Background<\/u><\/strong><\/p>\n

United Insurance Holdings Corp. (\u201cUIHC\u201d or the \u201cCompany\u201d) is a property and casualty insurance holding company.[1]<\/a>\u00a0 Founded in Florida in 1999, UIHC is primarily engaged in the homeowners property and casualty insurance business.[2]<\/a>\u00a0 Although since its founding Florida has remained a significant emphasis for the Company (accounting for just over half of the Company\u2019s policies in-force in 2015), since 2010, UIHC has continued to expand to an additional ten states.\u00a0 During this expansion, the Company has maintained its focus on coastal regions of the United States.[3]<\/a>\u00a0 In line with this focus, UIHC targets \u201careas where the perceived threat of natural catastrophe has caused large national insurance carriers to reduce their concentration of policies.\u201d[4]<\/a> \u00a0UIHC aims to manage its risk of catastrophic loss through: sophisticated pricing algorithms, policy diversification, and reinsurance participation.[5]<\/a>\u00a0 The Company believes that its successful record in catastrophe-exposed areas demonstrates a competitive advantage for continued expansion into regions facing similar \u201cperceived\u201d threats.[6]<\/a><\/p>\n

This logic assumes that UIHC\u2019s historical results accurately predict the Company’s future returns. \u00a0In fact, on its website, UIHC states that it has \u201cmodeled every historical hurricane\u2026 over the last 115 years\u201d to justify that its catastrophe reinsurance is robust as it is significant enough to cover damages over any historical period.[7]<\/a>\u00a0 According to research, however, this is fundamentally flawed.\u00a0 But for significant changes in current emissions patterns, climate change will likely dramatically alter the coastal property landscape.[8]<\/a>\u00a0 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]<\/a>\u00a0 This could directly, and irreparably, harm UIHC\u2019s business.<\/p>\n

Climate Change Guidance<\/u><\/strong><\/p>\n

In February 2010, the SEC issued an interpretive release titled Commission Guidance Regarding Disclosure Related to Climate Change.[10]<\/a>\u00a0 In this release, the SEC referenced a 2008 study performed by Ernst & Young and Oxford Analytica which identified climate change as \u201cthe number one risk facing the insurance industry.\u201d[11]<\/a>\u00a0 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\u00a0the insurers were taking to mitigate these identified risks.[12]<\/a>\u00a0 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]<\/a><\/p>\n

UIHC Response<\/u><\/strong><\/p>\n

Prior to this time, the potential impact of climate change on\u00a0the Company’s\u00a0business was ignored in UIHC\u2019s filings.[14]<\/a>\u00a0 Accordingly, the SEC\u2019s Division of Corporate Finance issued a letter to UIHC requesting that the Company provide \u201crevised risk factor disclosure that addresses the issue of climate change.\u201d[15]<\/a> \u00a0The Company appeared to take this guidance seriously in its revision to its 2011 Annual Report adding the following language:<\/p>\n

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. <\/strong>\u00a0Climate 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.\u00a0 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]<\/strong><\/a> <\/em>[emphasis added]<\/p>\n

This same language was included in the Company\u2019s 2012, 2013 and 2014 Annual Reports.[17]<\/a>\u00a0 In 2015, however, when addressing the risk of climate change, the bolded portion of the quote was removed.[18]<\/a>\u00a0 UIHC\u2019s continued targeting of a region that is particularly susceptible to the impacts of climate change coupled with the\u00a0removal of this language appears to suggest either a downplaying – or outright rejection – of scientific consensus regarding climate change.<\/p>\n

Recommendation<\/u><\/strong><\/p>\n

The dramatic impact that\u00a0climate change may have on UIHC\u2019s 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.\u00a0 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.\u00a0 Instead, UIHC appears to simply be complying with minimum SEC disclosure requirements. \u00a0Rather than treating the SEC\u2019s 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.\u00a0 In doing so, the Company will have the opportunity to\u00a0capitalize on the benefits of early\u00a0adaptations, and move towards open dialogue with customers and investors on the issue. \u00a0(795 words)<\/p>\n

[1]<\/a> United Insurance Holding Corp. Form 10-K for the fiscal year ended December 31, 2015, page 4.<\/p>\n

[2]<\/a> http:\/\/www.upcinsurance.com\/about-us\/<\/a><\/p>\n

[3]<\/a> http:\/\/www.upcinsurance.com\/about-us\/<\/a>; United Insurance Holding Corp. Form 10-K for the fiscal year ended December 31, 2015, pages 9-10.<\/p>\n

[4]<\/a> United Insurance Holding Corp. Form 10-K for the fiscal year ended December 31, 2015, page 4.<\/p>\n

[5]<\/a> United Insurance Holding Corp. Form 10-K for the fiscal year ended December 31, 2015, pages 4<\/p>\n

[6]<\/a> United Insurance Holding Corp. Form 10-K for the fiscal year ended December 31, 2015, page 4.<\/p>\n

[7]<\/a> http:\/\/www.upcinsurance.com\/why-upc\/<\/a><\/p>\n

[8]<\/a> Kate Gordon, \u201cRisky Business: The Economic Risks of Climate Change in the United States,\u201d The Risky Business Project, June 2014, p. 4.<\/p>\n

[9]<\/a> Kate Gordon, \u201cRisky Business: The Economic Risks of Climate Change in the United States,\u201d The Risky Business Project, June 2014, p. 4.<\/p>\n

[10]<\/a> 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.<\/p>\n

[11]<\/a> 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).<\/p>\n

[12]<\/a> 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.<\/p>\n

[13]<\/a> \u201cSEC Guidance on Disclosure Related to Climate Change\u201d Journal of Accountancy Article dated January 1, 2011. See: http:\/\/www.journalofaccountancy.com\/issues\/2011\/jan\/20103158.html<\/a>.<\/p>\n

[14]<\/a> United Insurance Holding Corp. Form 10-K for the fiscal year ended December 31, 2010.<\/p>\n

[15]<\/a> Letter from UIHC to Daniel Greenspan and the United States Securities and Exchange Commission Division of Corporate Finance dated September 7, 2011.<\/p>\n

[16]<\/a> United Insurance Holding Corp. Form 10-K for the fiscal year ended December 31, 2011, page 17.<\/p>\n

[17]<\/a> United Insurance Holding Corp. Form 10-K for the fiscal years ended December 31, 2012, 2013 and 2014.<\/p>\n

[18]<\/a> United Insurance Holding Corp. Form 10-K for the fiscal year ended December 31, 2015, page 20.<\/p>\n","protected":false},"excerpt":{"rendered":"

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. 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