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What the Insurance Industry Thinks About Climate Change
Hugh Pickens DOT Com writes "Joseph Stromberg reports at the Smithsonian that if there's one group has an obvious and immediate financial stake in climate change, it's the insurance industry and in recent years, insurance industry researchers who attempt to determine the annual odds of catastrophic weather-related disasters say they're seeing something new. 'Our business depends on us being neutral. We simply try to make the best possible assessment of risk today, with no vested interest,' says Robert Muir-Wood, the chief scientist of Risk Management Solutions (RMS), a company that creates software models to allow insurance companies to calculate risk. Most insurers, including the reinsurance companies that bear much of the ultimate risk in the industry, have little time for the arguments heard in some right-wing circles that climate change isn't happening, and are quite comfortable with the scientific consensus that burning fossil fuels is the main culprit of global warming. 'Insurance is heavily dependent on scientific thought,' says Frank Nutter, president of the Reinsurance Association of America. 'It is not as amenable to politicized scientific thought.' A pronounced shift can be seen in extreme rainfall events, heat waves and wind storms and the underlying reason is climate change, says Muir-Wood, driven by rising greenhouse gas emissions. 'The first model in which we changed our perspective is on U.S. Atlantic hurricanes. Basically, after the 2004 and 2005 seasons, we determined that it was unsafe to simply assume that historical averages still applied,' he says. 'We've since seen that today's activity has changed in other particular areas as well—with extreme rainfall events, such as the recent flooding in Boulder, Colorado, and with heat waves in certain parts of the world.' Muir-Wood puts his money where his mouth is. 'I personally wouldn't invest in beachfront property anymore,' he says, noting the steady increase in sea level we're expecting to see worldwide in the coming century, on top of more extreme storms. 'And if you're thinking about it, I'd calculate quite carefully how far back you'd have to be in the event of a hurricane.'"
I actually personally think global warming is happening just I doubt the insurance companies care one way or another other than the direction and magnitude of expected adverse events.
With climate modelling the problem is a hugely nested group of models all of which can be off by a lot. They have a model of how various greenhouse gases interact with longterm weather patterns (general air currents, typical ocean currents etc) but also the different layers of the atmosphere. So they end up with a model of how the gases work, a model of how they are produced, and a model of how the interrelated weather patterns behave.
I have a bachelors and a few publications in physics doing computer modelling and we were happy if we could get the direction right and within an order of magnitude. I suspect climatologists are the same way especially since it is such a cross domain problem (fluid dynamics, chemistry and when it actually affects people demographics).
Demographics/social side of things will be key IMO and often ignored. I see all sorts of maps showing where the water level will be and where the population centres are. The thing is people can move and generally are much less tolerant of death tolls than the actual economic cost of the death tolls (ex: people in the US panic that a few thousand people died due to terrorism in one year which works out to about 0.0001% of the population and hasn't since been repeated). If things get too bad near the shore they'll move further in land and I'd suspect 90+% of the existing population will be survivors. You still have things like droughts and such but storms are another matter. Deaths due to storms as they are predicted pretty much assume people will continue living where they do and that governments won't invest in better infrastructure to be able to detect early and efficiently evacuate areas before the storm hits. Sure there are little island nations that might get wiped out but the thing is they are little and thus a relatively small percentage of people. The LAs and New Yorks of the world will figure out what they need to do to balance the risk/reward for living there or will become vacate wastelands a la Detroit which they have proven is possible in the time scale we expect global warming to take hold as it has happened before (see Detroit :)).
In terms of storms insurance companies will care because they'll have to pay for the lost infrastructure. It will be an emotional trying time for people dealing with a Katrina every year but the actual species cost I suspect will be pretty low. Of course insurance companies also insure crops and people need to eat and drink ... that is what will kill us from global warming. Weather patterns in the sense of 100 year storms not so much.
Except for the part where they've sufficiently lobbied the government so as to make it nearly impossible for a "startup" to get into the insurance gig. You might as well tell someone if they think they can do a better job of providing internet access for a cheaper price than the incumbents, they should do so. History has proven it's ENTIRELY possible to provide a better service at a cheaper price - in a vacuum. In the current state of lobbied government officials putting up roadblocks and endless court battles that may be completely invalid, it's almost impossible.
If they lowered their rates just slightly they'd steal customers from higher-charging companies. If climate change didn't occur then they'd win out.
I don't think you understand what RMS is. They are not an insurance company, who has to compete on premiums, they sell a model of losses to many insurance companies and they are the de facto standard (there are two or three more but RMS is the 800 lbs gorilla). So when their model says, you have to charge much more, insurance companies like that because they can all increase premiums without being perceived as colluding together in violation of antitrust laws. Although an individual insurance company cannot charge much more than what the rms model says, in aggregate the insurance companies are all quite happy when RMS says that they all have to charge more.
Since Wilma, there have been no major hurricanes which have made landfall on the US mainland. Zero. Sandy was not a "major hurricane"; it did a lot of damage because of where it hit, but it was still only Category 1 in strength. This is the longest major hurricane drought on record.
https://www.genevaassociation.org/media/616661/ga2013-warming_of_the_oceans.pdf
3.2. External: maintaining insurability through promoting risk mitigation
As shown, ocean warming implies that the threat of natural catastrophes is ambiguous. At the same time, it can be shown that the ambiguity aversion of rational individuals may increase self-insurance but decrease self-protection (Alary et al. , 2010). The interplay between the potential of rising risk levels and insurance demand, but decreasing self-protection, could create a risk environment that is uninsurable in some regions (Herweijer et al ., 2009). Examples for markets with this potential are U.K. flood or Florida wind storm insurance.
In general, the only way to ensure that ambiguous risks remain insurable is to promote risk mitigation today (Ranger and Surminski, 2012). The insurance industry should play an active role in raising awareness of risk and climate change through risk education and disseminating high-quality risk information (Ward et al ., 2008).
They're saying that insurance (and re-insurance) isn't enough anymore.
If people aren't mitigating their risks, there will be no insurance.
That means taking steps like hurricane straps on your roof or bolting the house to its foundation or not building in a flood plain or the yearly path of a hurricane.
[Fuck Beta]
o0t!
You've left something else out.
Risk pool. The problem with overestimating risk and thus having higher premiums isn't that nobody will buy your insurance, it is that many fewer people will buy your insurance thus giving you a smaller than predicted risk pool. Which means the amount in claims you will pay out becomes unpredictable. You could get lucky and make a mint. Or you could go bankrupt because you had a statistically higher than average number of claims.
Bigger risk pool = closer to average the risk pool will behave = more accurate prediction of claims to be paid.
It also helps that a more customers but with a smaller profit margin can lead to a larger absolute profit than a higher profit margin but with fewer customers.
The long and short of it is, insurance companies have a vested interest in making accurate predictions as over or under estimation can lose them money or make them go broke.
I actually personally think global warming is happening just I doubt the insurance companies care one way or another other than the direction and magnitude of expected adverse events.
And that's basically the short term direction. According to TFA, they don't really care if there's long term global warming or not, because they usually sell policies one year at a time. They just want to know how variable the next year might be so they can set the rates to offset the risk.
Most insurance policies have a lifespan far longer than one year. They merely renew each year. If people let policies lapse or cancel them, then an insurance agent has to go out and actively solicit for business instead of simply soliciting for new business. And there's a lot of risk that one-shot customers would bounce around rather than remain loyal. As it is, Y2K was a relatively small issue for a lot of insurance data. When I worked in the business, there were customers with active policies born in the 1800's, and possibly even some policies dating back to then.
It's not a zero-cost thing to insure someone. Quite a bit of work has to be done to determine the risks and therefore the necessary rates. Insurance companies also have to be able to project future possibilities as much as possible, whether it's global warming or likelihood of a smoker for dying from cancer before age 45.
Although it has become the fashion for just about every company to look to the short term, insurance companies can only do that in certain ways, since the industry itself is based on spreading risk over not only breadth of customer base, but over time. In fact, a lot of the problems that they've experience in recent years can be attributed to their attempts to narrow this base in the hopes of maximizing profits by "cherry picking" and "lemon dropping", since such practices are more sensitive to wider statistical swings than less focused tranching is.