Risky business: insuring against climate change

Thumbing idly through last Friday’s Business Herald lift-out, I clicked to attention at a double page spread headed Climate of Fear reporting on how seriously the insurance industry is taking climate change. Peter Huck’s article didn’t appear on the Herald website for a few days, but it’s there now, I’m glad to report.  It’s a thorough and scientifically aware piece of journalism which it was pleasing to see given prominence in the paper. And no, he didn’t go looking for any obliging deniers to balance the concern of the insurance industry.

How do insurers calculate their exposure, as “hundred year” weather disasters become ever more common in the “new normal”?  Getting a handle on it means taking climate science very seriously. And the news on the science front is not good, as he briefly recounts.

For those in the risk management business, simply denying climate change is not an option. Floods, hurricanes, drought, all mean payouts, and if insurance companies haven’t had premiums in line with the level of risk they’re in serious trouble.  There is growing consensus in the insurance industry that the warming climate is amplifying precipitation and floods.  The questions the insurers have about this are consequential. How soon? How much? And how to respond?

Huck refers to German reinsurer Munich Re’s disaster database which notes losses from weather-related catastrophes rose “by a factor of three” from 1980 to 2009, from some 130 events a year in the 1980s to over 350 a year today. He sees a similar trajectory in New Zealand where Insurance Council figures, excluding the Christchurch earthquake, record 36 natural disasters during the 1990s costing $214 million, rising in the following decade to 57 episodes costing some $630 million. Aggregate costs rises can be partly driven by higher property values and more people living in vulnerable areas, but Munich Re considers it likely that the growing number of weather-related catastrophes can only be explained by climate change.

One response of insurance companies is to deny insurance or to substantially increase premiums in places deemed to be at high risk, and Huck gives examples from the US such as Allstate, one of the major US insurers, saying that climate change prompted it to cancel or not renew policies in many Gulf Coast states. He couldn’t get comment from the NZ Insurance Council as to the likelihood of coverage denial in this country, but there has been news in the last day or two that the Christchurch City Council is in difficulty finding new insurance cover for the city’s assets. Not a climate change matter, but nevertheless an example of the realities which insurance companies don’t have the option of ignoring.

Huck surveys the possibilities of increasing difficulties in insurance purchase for homes and businesses located on a floodplain already battered by a weather-related disaster, or threatened by tidal surges which may intensify as sea levels rise due to climate change. The latter has major implications for many low-lying coastal communities, including, he points out, Auckland.

I was reminded of reference to insurance of coastal properties in several of the books I’ve reviewed on Hot Topic. Stephan Faris in Forecast wrote of the South Florida Coast among other places and described the very sharp rise in insurance premiums and refusals to offer insurance coverage. He quotes the blunt remarks from one company: “We believe what the scientists are telling us…We believe it would be bad business to continue to add to our risk.”  Faris comments that while the world has not yet put a formal price on carbon, the cost of global warming is beginning to be monetized in higher insurance prices. Orin Pilkey and Rob Young in The Rising Sea record that government doesn’t necessarily take a hint from insurance companies. They say that Florida extraordinarily still permits the construction of high rise shoreline buildings, itself taking over the financial obligation since insurance companies have backed away from insuring coastal properties. Mark Hertsgaard in Hot describes the state’s assumption of that responsibility as insurer of last resort as ‘monumentally risky’.

Huck’s article notes that the insurance industry engagement with climate change has been more than avoidance of too much risk.  He refers to two substantial and important papers in the insurance world which consider positive contributions the industry can make to mitigation and adaptation. I’ve had a look at them, and been impressed by their understanding of the science and their desire to see insurers play an active part in fighting climate change. One, The Insurance Industry and Climate Change is a 2009 report from the Geneva Association, a research think tank for the industry. Its many positive suggestions in conclusion include investing in clean energy projects. It speaks of the industry moving from being a passive climate change sufferer that has to sustain some very expensive consequences to becoming a proactive shaper of the future.

The other report is From Risk to Opportunity 2008: Insurer Responses to Climate Change. It was commissioned by Ceres, the American network of investors and environmental organisations which addresses sustainability challenges, and written by Evan Mills, of the Lawrence Berkeley National Laboratory. It details many steps taken by insurance companies to engage with what are recognisably constructive engagements with climate change solutions and sets out how companies can best move towards best practices. The President of Ceres in his introduction sums up the intention:

“Climate trends are creating risks on both sides of the insurance house—underwriting and investment. But these trends also create vast opportunities, from product innovation to investment alpha, for insurers to be part of the global warming solution.”

To return to Huck’s article: he concludes that insurers are grasping the nettle of climate change and speculates that governments might even follow suit. I think that depends on when the so-easily-distracted politicians read the signs that the insurance industry is putting out. They’re really the same signs as the scientists, and they’ve got urgent written all over them.

The best insurance against sea-level rises, storms, floods, droughts and heat waves would surely be for the world to set a target of no more than 1.5 degrees warming. It would also be the cheapest insurance on offer in spite of the speedy re-orientation of economies it would require. UN climate chief Christiana Figueres may have upset negotiators recently when she called for a lowering of the target from the current 2 degrees, but she’s telling the plain truth.

Any chance of New Zealand, newly alerted to the cost of natural disasters, joining the small island states and many developing countries in urging that lower target in international forums and pushing the domestic changes required to match it? We can’t stop earthquakes, but we can support a genuine effort to contain human-caused global warming.

13 thoughts on “Risky business: insuring against climate change”

  1. The Christchurch situation has taken a long time for the media to cotton onto. It was obvious from the moment that first quake struck, and the scale made apparent, that insurance companies were going to bail on a lot on the insured. These large aftershocks are just nails in the proverbial coffin.

    No one anticipated such an event, and no insurance company will have sufficient funds to cover the payouts, despite their empty assurances. You will see lots of wriggling by insurance companies to get out of their obligations. I feel very sad for the people of Christchurch. I understand putting on a brave face and all the fighting talk, but the reality is the place is only ever going to be a shadow of its former self. The ground has got to stop shaking first.

    As far as climate-related risk, I guess we’re going to see certain flood- prone, wave damage-prone areas become uninsurable. Interesting that we were only talking about this eventuality a year or so back, and now the insurance industry is sounding the alarm.

    I just hope well intentioned, but naive, NZ governments don’t try to act as insurers of last resort too.

    1. Yes indeed. As soon as a regions insurability is gone, so will its inhabitability. I long thought that AGW deniers should be opening their own insurance company offering confidently coverage where no sane investor would tread…. This would sort them….

      1. And certain people we know could step in to explain to all those actuaries, accountants and assessors who are merely actively working in the industry that they may very well possibly be at least somewhat wrong or wrongish and that it’s almost certainly somewhat quite probablish that it might all turn out to be sunspots or leprechauns or something…

    1. If they had, they would have red-stickered everything between the coast and West Melton/Burnham. I suspect that decision-makers are all too aware of the climate change risks, they are involved with insurance after all, but they also know that on this subject calling a spade an effin ni**er would be political harakiri, with the only honour coming years after they have gone and people realise it was a wise decision.

      There is a rumour afoot that there is more bad news coming with Ecan being about to publish more detailed flood-plain maps that will make insurance cover difficult in a lot of areas. Given that the Waimak is steadily accumulating gravel and will continue to do so indefinitely, we just have to accept that some day it will ‘fall off” its riverbed and seek a new route to the sea. Of course, we could just keep increasing the height of the stop-banks, but ultimately they would need to be around 300m high. Or maybe abstract all of the water at the Gorge for irrigation purposes to stop it flushing the gravel downhill. That would lead to a helluva pile-up of gravel at the gorge, but it would work for a few generations. Unfortunately, the Kaikoura orogeny ain’t gonna stop just because we find it inconvenient.

  2. Your disgusting exploitation of a tectonic event unrelated to CAGW is further explananation of why climate alarmism is rapidly running out of suckers:
    “According to the Lowy Institute poll, 75 per cent of Australians believe the federal government has done a poor job addressing climate change.

    Just 41 per cent think the issue is a serious and pressing problem, down five points from last year and 27 points since 2006.

    Australians are also much less willing to pay a price to tackle climate change, with 39 per cent not prepared to pay anything extra.”

    1. Yep, the laws of physics – it’s all about the polling. I’d agree Labor’s done a poor job, so that’s not much of a result.

      Ah, that gloating ninny Downer would be celebrating that other gloating ninny Abbott’s successful scare campaign over the carbon tax. I wonder if posterity will judge them so kindly? A Great Big New Tax, wooooooo! booga booga; from the people that gave us the GST – satire dies a thousand deaths!

      In fact, I’ll wonder how posterity will judge you, Steve. And what do your University fellows think of you, and your extracurricular activities, by the way? One does wonder. Let me guess, you’re going to say they think you’re a secret hero, but for themselves they’re afraid Michael Mann and George Soros will take out a contract on them if they dare speak out?

      As for not paying, the polling remains, as before, that the older the respondent, the less they’re willing to pay anything at all. Guess all those Commonwealth Bank advertisements aimed at persuading Baby-Boomers that ‘retirement is payback time’ paid off. A nation of what former PM Hawke would call ‘Silly Old Buggers’. Pity about the grandkids, but hey!…

      So congratulations on having the numbers on the Ship of Fools, Steve. They’ll come back our way, of course, but by then it’ll probably be rather too late to do much about it. It’d be a relief, then, to be sufficiently mind-numbingly, self-righteously dense so as to not to be able to imagine just what a stupid git you are going to feel.

    2. What a ridiculous “argument”. If the best you quasi-libertarians have is opinion poll results, you’re stuffed. I notice that the smartest one of your number is still too coy to come here and hold forth – he confines his sarcastic putdowns and rants to newspaper blogs, and clearly knows he’d get a right working over if he tried it on here.

    3. Oh and you forgot to mention Steve that about 50% of Americans believe that evolution is wrong, that the earth is young…. So therefore ten we conclude with Steve that Science is so yesterday…. so lets follow Steve and lets bring back the rule of belief where the gutterpress and the majority of illiterate simply decree what reality is like and what is RIGHT and what is WRONG… and were people get told what to believe again…. Makes life so much easier when you don’t need to crank the brain up each morning…..

    4. I notice that he hasn’t returned, nor has he answered my question regarding his status within his own University that I’m genuinely curious about, and I’m sure I’m not the only one.

      Anyway, here’s an interesting link on the theme of that poll.

      It’s nice to see the extent to which the smart-but-relatively-demure people are beginning to bring the fight back to the confusionist loudmouths, via the ‘Clearing up the Climate Debate’ series at The Conversation, regular ‘your arguments are all pretty-stupid, you know’ postings at The Drum etc..

      The open ridicule of the straight-forwardly described ‘denier’ Monckton has been a sea-change as opposed to the disproportionate pandering – including from the ABC – that characterised his last visit. He’s still getting way more attention than his ludicrous notions deserve, but at least its clearer to anyone with the wit to see it just how ludicrous they are. He’d spouted equally outrageous drivel as his ‘Garnaut is a Nazi’ stuff shortly before his last visit – e.g. ‘the Green Hitler Youth is probably killing more people than the Nazi Holocaust‘ – but none except the voluntarily-deluded is politely ignoring the raving this time round.

      (Sometimes I think it’s all a dream – how can anybody who claims to have any sense or decency ever have supported something so fantastically ridiculous?!)

      This point-by-point challenge from The Conversation is also enjoyable.

      Bertrand Russell said ‘the fundamental cause of the trouble is that in the modern world the stupid are cocksure while the intelligent are full of doubt.’

      I know that the Dunning-Krugerite Denialists will imagine that they’re the heroic doubters in this case – after all, don’t they call themselves “sceptics” – but in actual fact what we’re seeing here is this other side of the DK coin – the people with the actual knowledge are more likely to think ‘well, hang-on, maybe I need to check I’m not making false assumptions here’ while the imbeciles cheerfully run around claiming a global Nazi/Communist conspiracy and massive IPCC ‘profits’ and vested interest!

      In short, beliefs that only someone who has a remarkably limited knowledge of the world or its history, and virtually no capacity for self-reflection whatsoever, could possibly hold to be true.

      The truth, folks, is that we’ve been suffering fools, if not exactly gladly, then certainly far too kindly, for far too long.

      If we allow the strident and self-deluded to continue to run around routinely spouting crap in the public arena and remain too patient and polite to point out that it is crap, always has been crap, and always will be crap – and the time for ‘debating’ it is long past – they’re going to cook the planet. Make no mistake about it.

      In fact, isn’t it notable that the same people are usually the first to complain about ‘Political Correctness’ and too much ‘pandering to minorities’? Well, sauce for the goose is sauce for the gander – perhaps it’s time we relaxed our inhibition in labelling voluntary idiocy as such!

  3. Quoting Bill: “If we allow the strident and self-deluded to continue to run around routinely spouting crap in the public arena and remain too patient and polite to point out that it is crap, always has been crap, and always will be crap….”
    At what point does repeating long refuted ‘facts’, distortions and errors become blatant lying. The Americans make a big deal about lying to Congress, but it seems that politicians being economical with the truth about blue dresses get crucified but anyone spouting unmitigated bullshit about climate science can get away with it unchallenged.
    Here in NZ, if someone used outright lies when discussing politics, finance or even sport would be pilloried but bad science goes unnoticed.

    1. We also seem to have entered some bizarre, pseudo-post-modern hell where every idea, no matter how manifestly idiotic, has to be treated as if it were equal.

      Well, any idea that suits certain particular interests, anyway…

      Ironically, if certain parties had done any reading they’d discover that the same groups who are now denying AGW were using techniques such as wielding the US’ Fairness Doctrine (in broadcasting) to enforce ‘equal time’ for their blatantly wrong and minority views on issues such as acid rain – even at the exact same time as the colluding Reagan administration was winding the regulation back because it allowed too much time for espousing positions that might genuinely be in the public – rather than corporate – interest!

      But no – the IPCC, that’s where the real power lies!

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