Insurance Industry vs Nature

November 18, 2018

In a year of disasters, TV commercials reflect awareness that climate impacts are moving into uncharted territory.

Tagline above –  “Human Nature > Nature”…uhmm…sounds like a recipe for a rude shock…

Andy Hoffman in the Conversation:

Unfortunately, convincing politicians, business leaders and the public that these costs are the result of increased climate change risk hasn’t been easy, a challenge that has been a major focus of my work for almost 10 years.

In 2013, I helped convene a series of executive forums to introduce a wide range of business executives to the 30 petabytes – 30,000,000,000,000,000 bytes – of weather and climate data in the National Climatic Data Center’s possession.

While the hope was that they would see the value of such vast amounts of data in managing climate risk, we found limited interest, leaving us to wonder if we were too early and whether our target was too broad.

This led me and others to realize that we should be more focused on insurance companies, society’s first line of defense in absorbing these costs, making their industry arguably the one most directly affected by climate change.

For example, the insurance industry paid out a record $135 billion from natural catastrophes in 2017, almost three times higher than the annual average of $49 billion. That’s not to mention the uninsured losses that were also incurred – uninsured losses from 2012’s Hurricane Sandy were 50 percent of the total $65 billion in losses, a staggering tab picked up by individual citizens and the taxpayer.

Insurers will eventually adjust to this emerging reality. And with it will come changes in our economy, including higher costs that will affect everyone’s pocketbook.

Our ability to drive a car, buy a house, build an office building, run a manufacturing plant and enter into contracts are all supported by insurance. Without it, a great deal of these activities would become more expensive or even stop.

And so, as the insurance sector adjusts to factor the growing risks of climate change in coverage and premiums, it will become a powerful lever for pushing society and the economy to become more resilient to the changes that climate change is expected to bring.

While reinsurance companies – which basically insure the insurers – have been studying increasing climate-related risks for decades, traditional insurance companies with familiar names like State Farm, Travelers and Liberty Mutual haven’t.

There are two primary reasons for this. The first is that they’ve been able to pass on the most catastrophic or uncertain risks to reinsurers and other investors. The second is that insurers are overconfident that they’ll be able to quickly adjust their policies on a year-to-year basis to manage climate risks. Hence a 2012 study found that only 12 percent of insurance companies had a comprehensive climate change strategy.

This is starting to change. A 2018 study found that 38 percent of insurance companies now consider climate change to be a core business issue, a figure that will likely continue to grow.

In August of this year, the International Association of Insurance Supervisors, a respected international standard-setting body for the insurance sector, published a report outlining climate risk a strategic threat for the insurance sector. It cautioned against relying on annual adjustments to manage climate risks as physical risks can change suddenly and in “non-linear ways.”

Recognizing this threat, many insurers are throwing out decades of outdated weather actuarial data and hiring teams of in-house climatologists, computer scientists and statisticians to redesign their risk models.

Ultimately they are examining if they need to change their coverage and raise their rates. This is where the impact will be felt, compelling citizens, businesses and governments to perk up and pay attention.

UPDATE: Financial Review:

Insurance giant IAG has warned a failure to reduce greenhouse gas emissions could result in a world that is “pretty much uninsurable”, with poorer communities likely to bear the brunt of the effects.

In Australia, IAG said temperature increases of more than 3 degrees would expose greater swaths of Queensland to cyclones and flooding, while a rise of more than 4 degrees could make the risks to insurers prohibitive.

“It’s a big question because it depends on reinsurance capital, but if you take some of the models that are being done on cyclone risk, for example, there could be more of Queensland exposed to cyclone and flooding in a 3-degree world,” Jacki Johnson, IAG’s group executive people, performance and reputation, told The Australian Financial Review.

There is some commentary globally that in a 4-degree world, the world becomes pretty much uninsurable.”

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3 Responses to “Insurance Industry vs Nature”

  1. Stephen Nielsen Says:

    1980 world population = 4.5 billion
    1980 US population = 226 million

    General formula: More people = more carbon = higher odds for atastrophic climate change


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