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What the Insurance Industry Thinks About Climate Change

Posted by samzenpus on from the hedge-your-bets dept.

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.'"

40 of 385 comments (clear)

  1. You would trust insurance companies on this? by Chemisor · · Score: 5, Insightful

    Insurance companies are always looking for an excuse to raise rates. They are not going to look for evidence against global warming when they can pretend that it has all been totally proven and tell clients that the risks are now sky high and, oh, by the way, your rates are now 60% higher to account for that.

    1. Re:You would trust insurance companies on this? by ILongForDarkness · · Score: 4, Insightful

      At best the types of data that insurance companies would collect would be measurements of effects not proof of a cause. All you can say about more storms hitting areas that you insure is that for some reason there is more storms lately. You can't say whether or not it is due to man made reasons, geological cycles, purple space gods that are angry that 30 Rock went off the air etc.

    2. Re:You would trust insurance companies on this? by Anonymous Coward · · Score: 5, Informative

      Well, I work for an insurance company and I can tell you, the difference between the actuaries correctly predicting future claims and incorrectly is the difference between a product making money and costing money. We try and produce new marketable products every few years and the failure rate is high, with millions in up front investment down the drain. Actuaries have a vested interested in getting it right, so they're not priced out of the market whilst still being profitable. Just ignoring that traditionally insurance companies don't make money on premiums but on investing the money before the insurance is claimed against... of course, that tradition is not very alive any more... but that is how it once was.

    3. Re:You would trust insurance companies on this? by Anonymous Coward · · Score: 3, Funny

      I'd trust insurance companies.

      In fact, I'll one up them. You know how nobody's ever responsible for acts of god?

      Well, I will be. For $1m/year, I will insure anything against acts of not only the Judeo-Christian god, but any god*.

      (* Gods restricted to beings of divine origin only. Music is not your god, nor will we cover damage from sitting too close to the speakers of a cover band in your local dive bar. Coverage not applicable to damage caused by angels, demi-gods, exalted servants, or other quasi-divine beings.)

    4. Re:You would trust insurance companies on this? by Anonymous Coward · · Score: 4, Insightful

      If you really believe that, then your path to fortune is clear: start your own insurance company to compete with these bandits. If you think you can estimate risks more honestly and accurately than they do, you should be a billionaire within ten years.

    5. Re:You would trust insurance companies on this? by IAmR007 · · Score: 5, Informative

      Weather models and climate models look at an entirely different scales. Both involve complex fluid dynamics and such, but look at a different scale. Weather forecasting tries to predict the chaos. Climate modeling, on the other hand, concerns the patterns. A model of the Earth in current conditions can then be modified to have increasing greenhouse gases, geological cycles, etc. Some of those, like geological cycles, occur at a rate several orders of magnitude slower than what we are currently seeing. Just because computer models are virtual doesn't mean they can't be used to experiment. Computer models are vital for our understanding of things at extreme scales. Source: Masters in High Performance Computing

    6. Re:You would trust insurance companies on this? by sysrammer · · Score: 4, Insightful

      "'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,'"

      fwiw, I find this statement to be "controversy neutral".

      --
      His ignorance covered the whole earth like a blanket, and there was hardly a hole in it anywhere. - Mark Twain
    7. Re:You would trust insurance companies on this? by Anonymous Coward · · Score: 5, Insightful

      They changed it from "global warming" to "climate change" not because of an inaccuracy with the former term, but because dullards couldn't comprehend that global warming means global average and that certain areas will actually cool during this process. In other words, it was dumbed-down for people like you.

    8. Re:You would trust insurance companies on this? by PopeRatzo · · Score: 4, Insightful

      Insurance companies are always looking for an excuse to raise rates.

      Go past the headline, and you'll learn that there's a lot more to insurance companies' reaction to climate change than rate increases.

      Insurance companies, energy companies, pharmaceuticals, even military contractors are all planning for climate change. For anthropomorphic climate change. The biggest companies worldwide are baking climate change into their plans for their future.

      So I guess you can say that even John Galt believes in climate change. But not publicly, because it's useful for the rubes to think it's all some bogus nonsense that the 95% of scientists who are obviously liberal cooked up to take away your freedoms.

      --
      You are welcome on my lawn.
    9. Re:You would trust insurance companies on this? by ILongForDarkness · · Score: 4, Interesting

      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.

    10. Re:You would trust insurance companies on this? by WindBourne · · Score: 5, Insightful

      amazing.
      Scientists proclaim that climage change is occurring. Scientists are doing this for making money.
      American DOD studies it and proclaims that it is occuring and they need to be ready. Obviously, it is about making money.
      Insurance companies procmain that it is occuring and show evidence of it. Obviously, it is about making money.

      Then the oil companies and the GOP claim that it is not happening, and you claim that it is not about making money.

      Really? I guess that explains why we have creationism being pushed into schools.

      --
      I prefer the "u" in honour as it seems to be missing these days.
    11. Re:You would trust insurance companies on this? by djmurdoch · · Score: 3, Insightful

      Hurricane Ingrid made landfall and killed dozens of people. But it didn't make landfall in your country, so I guess things are fine.

    12. Re:You would trust insurance companies on this? by plover · · Score: 4, Informative

      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.

      --
      John
    13. Re:You would trust insurance companies on this? by msauve · · Score: 3, Informative

      "For the first time in recorded history there existed an open-water path between the Atlantic and the Pacific."

      Are you 13 years behind, or 69 years behind the times?

      There are also reports of pre-western history passages from the orient.

      --
      "National Security is the chief cause of national insecurity." - Celine's First Law
    14. Re:You would trust insurance companies on this? by IAmR007 · · Score: 4, Insightful

      Climate modeling is definitely hard to do, but they definitely aren't worthless. So far, the models seem to have been underestimates, which may be problems with the models, or may indicate that we are underestimating global warming. Perhaps, if we can model the climate at or beyond the exascale, we will find that we don't need to be as cautious. For the meantime, though, I think it best to err on the side of caution.

    15. Re:You would trust insurance companies on this? by tgibbs · · Score: 3, Insightful

      It's not just a statistical trend. We have a well validated body of theory that predicts increased damage as a result of rising seas, as well as rising temperatures feeding more energy into storms. And the statistical trend agrees with those predictions. An insurance company would be foolhardy not to take this seriously.

    16. Re:You would trust insurance companies on this? by minstrelmike · · Score: 3, Insightful

      At best the types of data that insurance companies would collect would be measurements of effects not proof of a cause.

      Exactly. That is ALL they ever collect.
      Sheesh. They know a bad credit rating doesn't _cause_ traffic accidents, but the population of bad credit risks has a higher accident rate than the other populations.
      It's called Statistics. It's the essence of the insurance industry. Reinsurers--the groups that insure the insurance companies you and me buy from--are the ones who first paid for the researchers who discovered that global warming means we get 5 disastrous hurricanes per decade instead of 3. Cause-effect on a storm level scale is too hard to pick out. But measuring the effect of a single volcano's emission of CO2 is easy. Extrapolating that to what humanity puts out which is about the same amount every three days means you take some guesses.

      And it you're smart, or have money on the line, you try to take educated guesses. The best guess is called statistics. In fact, a standard regression over almost any set of data points will beat the expert opinion.

  2. Re:The insurance message is ... by charles2678 · · Score: 5, Insightful

    The downside is that their less-pessimistic competitors undercut them on rates and win big.

    Until, of course, the pessimistic view proves right, and those competitors go under. Or, if you're really pessimistic, get a bailout.

  3. Your knowledge from an insurance co? by Anonymous Coward · · Score: 5, Insightful

    Seriously, you take their estimate of risk as gospel? Their goal is to collect as much as possible, and pay as little as possible. They are simply trying to hedge their bets on the collection side. Duh.

    And for the record, the Atlantic hurricane intensity has not increased one iota. That is a complete outright lie which they should know if they spoke to an actual expert on Atlantic basin hurricanes. The reason for larger payouts from damage in the past is that MORE people and expensive property are near the coast lines. They have been subsidizing bad behavior. Climate change is not the culprit there.

    1. Re:Your knowledge from an insurance co? by GameboyRMH · · Score: 3, Insightful

      This is wrong. Not that they want to collect as much as possible while paying as little as possible, that's true, but the idea that they do so by "hedging their bets on the collection side." This would put them at a disadvantage. The more accurate their estimates, the more they can fine-tune prices to maximize profit.

      When they do spew fear-based rhetoric, like the IIHS does 24/7, it's not so they can jack up rates, it's so they can make the world safer. Jacking up their rates makes them less competitive, making the world safer is good for their whole industry because the price decrease can lag behind it, and there's more profit margin to be had on safer risks.

      --
      "When information is power, privacy is freedom" - Jah-Wren Ryel
  4. We have this thing called "competition" by sirwired · · Score: 4, Insightful

    If another insurance company thinks climate change is a bunch of bunk, they can lower rates and steal business from the company that has reached the opposite conclusion.

    1. Re:We have this thing called "competition" by Anonymous Coward · · Score: 3, Insightful

      "If another insurance company thinks climate change is a bunch of bunk, they can lower rates and steal business..."

      Which works until it's time pay for the damages.

      Insurance is about smart risk management not buying market share.

      Loading your book with cheap junk is surest way to lose money.

    2. Re:We have this thing called "competition" by Chalnoth · · Score: 4, Insightful

      The end result is still measurable in terms of profit. If there is no climate change, or it really isn't impacting severe weather, and insurance companies raise rates, then their profits will soar. If, instead, we have more severe weather and the insurance companies accurately predict it, their profits will remain about the same.

      I'm actually betting that they're going to have some severe financial troubles in aggregate, because I think the impact of global warming will be significantly worse than anybody's predicting. But we'll see.

    3. Re:We have this thing called "competition" by notanalien_justgreen · · Score: 3, Interesting

      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.

    4. Re:We have this thing called "competition" by FatLittleMonkey · · Score: 3, Informative

      or unusually high solar activity.

      Low.

      Lowest numbers of solar storms and sunspots in over a century. Low to the point where an entire sunspot cycle seems to have been skipped.

      --
      Science is all about firing a drunk pig out of a cannon just to see what happens.
  5. No opportunity by manu0601 · · Score: 3, Insightful

    Insurances are ready to accept global warming as it will help them adjusting their prices, but that does not mean they will do anything to prevent it, nor even to get it accepted by everyone.

    1. Re:No opportunity by TubeSteak · · Score: 4, Interesting

      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!
  6. Some industry experience by Ol+Olsoc · · Score: 5, Informative
    I sat in on a presentation given by an insurance industry executive a couple years ago, and he said in general, there are a couple things going on.

    People are building in places where they probably shouldn't build. Many of the good places to build are used up, and people have an almost irresistable pull to build in dangerous places.

    More people

    And yes, there are a lot more catastrophic events happening that are causing a lot more damage

    He said that even when the first two events are taken into consideration, there is something quantifiable happening, that makes the industry tend to believe that warming is taking place, and probably man has a hand in it.

    I wish I still had the presentation, because it had a lot of facts and figures, without the cherry picking that deniers love to employ. Pretty scary actually.

    --
    The shepherds did so well protecting the flock that the sheep no longer believed that wolves existed.
    1. Re:Some industry experience by bill_mcgonigle · · Score: 3, Funny

      My take is that if the US just dropped federal flood insurance, you'd see a considerable drop in "climate change induced" extreme weather events and of course, damage from such events.

      It almost sounds like you're against the poor inland people subsidizing the insurance on the wealthy's beachfront palaces. Commie.

      --
      My God, it's Full of Source!
      OUTSIDE_IP=$(dig +short my.ip @outsideip.net)
  7. correction: anthropo-something by PopeRatzo · · Score: 4, Insightful

    Oh, you know else who is making business decisions based on a future of anthropogenic (sorry, I typed wrong) climate change?

    ADM, Monsanto, Dow Chemical. Companies that are involved in worldwide agribusiness. They're all betting heavily on climate change (the anthro-something one).

    But not you, because you know better and the AM radio told you so.

    --
    You are welcome on my lawn.
  8. You missed a term by Weaselmancer · · Score: 5, Informative

    You're forgetting market pressure. Predict too high - nobody buys the insurance because it is too expensive and your competition is cheaper. If insurance were a monopoly you would be correct, however.

    And you seem to have missed the point this gentleman in the article was trying to make. The rainfall in Boulder is a good example, not a bad one. These people mine data for a living. If they're seeing catastrophic weather events trending upwards, that means something. He even said the old traditional averages around 05 have broken down.

    That's vitally, fantastically important information.

    --
    Weaselmancer
    rediculous.
    1. Re:You missed a term by njnnja · · Score: 5, Interesting

      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.

    2. Re:You missed a term by Maxo-Texas · · Score: 5, Insightful

      I get the point but similarly large rainfalls occurred several times last century. About the same back in 1914.

      Part of the devastation is due to building in dry creek beds. So the level of damage is due to more humans and unwise building habits.

      Climate change has potentially contributed to these type of rainfall events being more likely (and I've seen some charts which support this-- things that used to happen every 20 year are now happening every 10 years- maybe even more often). I've seen the number "12% more likely for extreme weather to occur" for that area of the country. Those articles were less able to prove it was global warming (the old causality thing) but leaned towards believing it was.

      But you still shouldn't build below historically observed storm surge levels or historically observed flood zones. You WILL get heavy damage and flooding.

      At the least, the government shouldn't pay for disaster relief for a particular area more than once a generation.

      --
      She was like chocolate when she drank... semi-sweet at first and then increasingly bitter.
    3. Re:You missed a term by Anonymous Coward · · Score: 3, Interesting

      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.

    4. Re:You missed a term by HeckRuler · · Score: 3, Insightful

      unwise building habits.

      Did you build your house on the top of a hill? High winds rip off your roof.
      Bottom of the hill? Floods.
      On the side of the hill? Mudslides.
      Built on a flat featureless plain? Tornadoes.
      Did you build a basement to seek shelter in? Heavy rains soak in and ruin everything.

      But areas with heavy rains aren't featureless plains, they develop rivers that cut gouges into the earth and make for bluffs. And mudslides only happen when there's extreme soil erosion. If there's going to be flooding at the bottom of the hill there's usually a RIVER there.

      All of those are arguments that make sense when the climate isn't schizophrenic. What appears to be "unwise building habits" AFTER the freak weather happens was a perfectly rational thing to do given the local climate. Nobody builds big towers in hurricane country. But what counts as "hurricane country" is changing. They didn't build the sewers of New york to deal with city-wide flooding. They are not prepared for that. They DID build the sewers of New Orleans to deal with city-wide flooding, because it's happening constantly. Changing that sort of infrastructure is expensive and hard. But not having a suitable infrastructure is ludicrously more expensive.

      So be careful with how you long about the term "unwise building habits". What was once perfectly wise, now isn't. And buildings last a really long time. Hopefully.

  9. Re:Maybe by Fjandr · · Score: 3, Informative

    Except insurance premiums won't cover the actual losses. Insurers only make money when the premium averages exceed loss payouts. That's why they typically absolutely refuse to cover certain circumstances. When the actual average risk of loss outweighs the area's premiums, it's a fundamentally stupid idea to cover those areas.

  10. The irony by quantaman · · Score: 5, Insightful

    Is anyone else basking in the irony of all these pro-business AGW denialists suddenly trying to come up with excuses for why the market disagrees with them?

    You don't need regulation for anything, market forces keep companies honest and well behaved!! Except now... because insurance companies are somehow able to charge unnecessarily high premiums without being undercut by a competitor, or the government is making them overcharge or something...

    The market is right, unless is disagrees with you, and then it's wrong.

    --
    I stole this Sig
  11. Re:Insurance companies are the biggest scam by bill_mcgonigle · · Score: 4, Insightful

    They exist to help it's customers in times of need, yet it's a for profit business. Those 2 do NOT work together.

    All businesses exist to help customers with their needs. Profits are a monetary signal that they're running the business correctly, and the incentive to put up the capital for risk in the first place.

    Real insurance is just a collective risk sharing pool with a management fee. Granted, regulatory agencies have made that simple reality as painful as possible.

    --
    My God, it's Full of Source!
    OUTSIDE_IP=$(dig +short my.ip @outsideip.net)
  12. Re:We're in a major hurricane "drought" by cforciea · · Score: 3, Insightful

    I find that a kind of odd statement. First of all, I wonder what you mean by "major" hurricanes and making landfall. Is "major" category 3, 4, or 5? Does it take into account things like diameter? Is that ever, or just when it makes landfall in the US? I mean, it sure seems like you are carefully crafting you wording to exclude some pretty notable storms, like Dean, Felix, and Ike. And Sandy is a pretty dubious non-major hurricane, given that it had the largest diameter of any Atlantic cyclone, which was a large contributing factor to how damaging it was. And what's with the US mainland only caveat? Climate change only counts if the hurricanes happen to make landfall within artificial boundaries on a map? Felix didn't turn north after slamming into the Yucatan the same way WIlma did, so it didn't happen? Besides, I think if you actually applied your criteria prior to 2005, you'll find that it eliminates so many hurricanes that an 8 year gap isn't statistically anomalous at all.

    When you have to get that oddly specific, you should be at least a little worried that you are cherry picking data to create "proof" of your already decided upon conclusion. If you instead just look at more general trends in quantity and strength of storms, it's pretty clear that we have had more and stronger hurricanes over time.

  13. Structure beneath the randomness by golodh · · Score: 5, Informative
    You claim two things here, namely that we can't produce a preponderance of evidence that:

    (1) that more widespread and severe weather extremes aren't related to an global change in weather patterns (i.e. climate change), and

    (2) and that this global change is related to human activity

    Well, that's an improvement on earlier positions taken in this debate in that you implicitly acknowledge that there are measurable and impactful weather changes. That used to be denied too (and still is by people who don't follow the news and by people who's thinking is faith-based rather than fact-based).

    As to whether climate change is happening, the successive IPCC reports are remarkably consistent. It is.

    As to the linkage between human activity and climate change, it's just the paragraphs aimed at the public and policy makers have been rephrased. Not the underlying observations and thought.

    New Scientist has a readable and accessible discourse on how people deal with the message.

    http://www.newscientist.com/article/mg21929360.200-climate-science-why-the-world-wont-listen.html