Pricing Climate Change: Insurance Industry feels the Heat

October 13, 2018

Are you in good hands?

Wall Street Journal (paywalled):

Home prices on the U.S.’s eastern seaboard, battered by fiercer storms and higher seas, are lagging behind those inland. Farmland prices are rising in North America’s once-frigid reaches, partly because of bets they will become more temperate. Investors are turning fresh water into an asset, a wager in part that climate change will make it scarcer.

Insurers are at the forefront of calculating the impact. “We don’t discuss the question anymore of, ‘Is there climate change,’ ” says Torsten Jeworrek, chief executive for reinsurance at Munich Re, the world’s largest seller of reinsurance—insurance for insurers. “For us, it’s a question now for our own underwriting.”

Unseasonably hot conditions contributed to the severity of the Fort McMurray wildfire in 2016, according to NASA scientists.

For the most part, insurers are acting on climate change by building models that aim to better estimate the impact. That leaves the industry with the tough question of how to reflect in premiums the new understandings of the underlying risk.
“It takes a lot of premium, a lot of margin, to account for this increased uncertainty, and I’m not sure we’re doing a good job of reflecting this and charging appropriately for it,” said Marc Grandisson, chief executive of insurerArch Capital Group Ltd., at an industry conference Thursday. “We need to incorporate a greater range of possible outcomes into our pricing.”
Arch has written less property-catastrophe reinsurance in recent years as prices have dropped and as industry results have been volatile, in part due to losses attributed to climate change, Arch spokesman Donald Watson says.

After the Canadian wildfire, Aviva’s changes to its risk models filtered into its home-insurance premiums in Canada, which increased by roughly 6% since 2016, partly because of its research into catastrophe risks.
Aviva’s home-insurance premiums in Canada increased roughly 6% since 2016, partly because of its research into catastrophic risks.

For most insurers, rates aren’t rising—yet. A flood of capital into the industry from pension and hedge-fund investors, driven by low interest rates, has increased competition and pushed down property-catastrophe reinsurance prices in the past decade.

And property insurance and reinsurance contracts typically last one year, so an insurer can recalibrate yearly as risks change. “Global warming may be occurring. Probably is,” says Warren Buffett, chief executive of Berkshire Hathaway Inc., which has a major reinsurance business. “But it hasn’t hurt the reinsurance industry. And people are pricing still as if it won’t, on a one-year basis.”

If reinsurance contracts covered 30 years, he says, “I’d be crazy not to” include the risks.

 

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One Response to “Pricing Climate Change: Insurance Industry feels the Heat”

  1. lracine Says:

    Yes the insurance industry has been looking at this for many years…

    Gail Tverberg is an insurance actuary that has a wonderful blog site. She has been writing about climate change and energy for many years. (I started reading her work when she was posting in the Oil Drum over 15 years ago).

    She is a thoughtful writer, if you want to explore this issue in more depth here is a link to her site.

    https://ourfiniteworld.com/

    Her latest post is a discussion of her presentation to the Casualty Actuaries of the Southeast regarding the economy and climate change.


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