No Deniers in the Foxholes: Insurance Industry Copes with Climate Reality December 2, 2013

Climate deniers hate those pesky intrusions of reality. For Insurance giants like Munich Re, Swiss Re, and Lloyds of London, climate change is a reality that is showing up where it hurts most, on the ledgers. The long piece excerpted below is quite an extraordinary investigation for a mainstream publication, and deserves a look.

Globe and Mail:

In the aftermath of the German and Canadian floods, the victims, the insurers, the media, the politicians and the scientists were all asking the same questions: What caused them? Was it the relentless buildup of atmospheric carbon dioxide? Could “extreme” weather events become the new normal or were they once-a-millennium acts of god? In Munich Re’s offices, there wasn’t much debate as the claims cheques flew out the door: The higher frequency of extreme weather events is influenced by climate change; and recent climate change is largely due to burning hydrocarbons. “I’m quite convinced that most climate change is caused by human activity,” says Peter Höppe, head of geo-risks research at Munich Re.

– His statement is not remarkable, even though the big American insurers don’t like to put the words “climate change” and “anthropogenic” in the same sentence. What is remarkable is that Munich Re first warned about global warming way back in 1973, when it noticed that flood damage was increasing. It was the first big company to do so—two decades before the Rio de Janeiro Earth Summit triggered a planetary anxiety attack by publicizing the concepts of “global warming” and “climate change.” Munich Re, Swiss Re and the other reinsurers, along with the Lloyd’s of London insurance market (unrelated to the bank of the same name), stand out from the rest of the business world by being on the same page as scientists on climate change. What’s more, while most of the planet has its head in the sand about the reality and requirements of global warming, the reinsurance industry has already moved on to mastering the math on other catastrophes. Höppe is compact, intense and enthusiastic. A bit rumpled, like a scientist from Central Casting, he loves to back up his statements with official sources, jumping up every few minutes during an interview to retrieve documents. The 1973 document he prints out for me is a source of pride within the company, which bills itself as “the first alerter to global warming.” The warning notes “the rising temperature of the Earth’s atmosphere [as a result of which glaciers and the polar caps recede, surfaces of lakes are reduced and ocean temperatures rise].” It points to the “rise of the CO2 content of the air, causing a change in the absorption of solar energy.” The warning ends with a pledge: “We wish to enlarge on this complex of problems in greater detail, especially as—as far as we know—its conceivable impact on the long-range risk trend has hardly been examined to date.” The pledge was fulfilled. Munich Re has been examining climate change since then, compiling the world’s most extensive database on natural disasters, covering some 33,000 events and drawing on research by its own staff and more than 200 other sources. “There hasn’t been any industry or company that has addressed climate change this early,” Höppe says. How did Munich Re and the other reinsurers get it right so early? The answer, in a word, is fear—fear of losses that could destroy their business. No industry has more incentive to know the effects of climate change than the reinsurance and insurance industries.

Climate News Network:

LONDON, 30 November – The insurance industry doesn’t like climate change. Global warming is introducing a whole new element into the business of quantifying risk – the basic function of the insurance business. One of the main challenges facing insurers is the increased occurrence of floods in many countries. The UK is one of the world’s leading insurance centres: a recent seminar at the University of Oxford in the UK examined flood patterns in Britain over recent years. Not only is the incidence of flooding increasing – it is also becoming ever more unpredictable. “No business, particularly the insurance industry, likes volatility” says Matt Cullen, a floods specialist at the Association of British Insurers (ABI). “There’s no doubt there’s been a ramping up of flooding in the UK since the 1990s and this tends to spook the insurers. And the situation is only going to get worse with climate change.” Assessing when and where flooding occurs is a highly complex business, says Professor Edmund Penning-Rowsell, of Oxford’s School of Geography and the Environment. Flooding is episodic and can also be very localised, he says: a particular area might be flooded for two years in succession and then be dry for ten years – while another, previously dry area sees the waters rise and homes wrecked.

The ABI says flood-related costs in the UK have been rising dramatically: over the 2000 to 2010 period the industry paid out £4.5bn (US$7.2bn) to those whose homes or businesses had been hit by flooding – a 200% rise on pay-outs in the previous decade. Under a long-standing agreement between the UK Government and the insurance industry, insurers have guaranteed that cover would be available to homeowners – even those judged to be in high flood risk areas – as long as the authorities continued to spend money on flood prevention works. That agreement ended in mid-2013: in a move being keenly watched in other parts of the world, UK insurance groups and the Government are now trying to come up with a formula which both guarantees continuing flood risk cover for homeowners in future and also ensures the continued financial viability of the insurance industry. Often, say insurance analysts, it’s the poorer in society who live in homes most exposed to flood risk. If there was a move towards a free-for-all in the insurance market, those households would either find it impossible to find insurance – or be forced to pay highly expensive premiums to specialist brokers. The ABI is proposing setting up a new scheme called Flood Re which would provide insurance at what it says would be an affordable level for those most at risk from flooding. Flood Re would run a multi-million pound fund — financed by a general levy on all household insurance policies — which would cover the costs of flood claims. The Government has given its tentative approval to the idea. However, the scheme is dependent on continuing government expenditure on building up flood defences. According to UK government figures, about 5.2 million properties in England alone – that’s one in every six properties in the country – are at risk of flooding, either from rivers or the sea or from surface water flooding. At present the UK is spending about £600m ($960m) per year on tackling flooding. The Government admits that, just to maintain existing flood protection levels, expenditure will need to rise by around 80% by 2035. And that estimate, say officials, does not include the cost of managing the risk of surface and groundwater flooding. – Climate News Network

Worth considering in this discussion: Eli Lehrer, Founder of the conservative R Street Institute, and formerly of the climate denialist Heartland Institute, broke with his colleagues a few years ago, for, among other reasons, his misgivings about the denial of science among right with “think” tank colleagues. Lehrer’s special expertise is on the insurance industry. He writes:

On one hand, if one doubts the opinion of an overwhelming majority of scientists, the insurance industry provides another major data point. Given that accurate and unbiased weather forecasts are key to property insurers’ business, the fact that the industry broadly accepts that climate change is real and likely to be a problem should be taken seriously by anyone who believes in the power of markets to aggregate information. If insurers were not concerned about climate change, that would be a very strong piece of evidence that politicians, the media or scientists have hyped the issue beyond what it deserves. In fact, every large property insurer incorporates climate change-related projections into its own models. Every large property insurer that I know of considers the likelihood of climate change-linked catastrophes to be a future operational threat. Smaller property insurers do less long-term planning and are less likely to make direct use of climate change projections, but they still feel the impact of those projections in terms of how much reinsurance they can buy and at what price.

Finally, a NOAA study authored, appropriately enough, by one Adam Smith, notes:

An increasing trend in annual aggregate losses is shown to be primarily attributable to a statistically significant increasing trend of about 5% per year in the frequency of billion-dollar disasters. So the question arises of how such trend estimates are affected by uncertainties and biases in the billion-dollar disaster data. The net effect of all biases appears to be an underestimation of average loss. In particular, it is shown that the factor approach can result in a considerable underestimation of average loss of roughly 10 to 15%. Because this bias is systematic, any trends in losses from tropical cyclones appear to be robust to variations in insurance participation rates. Any attribution of the marked increasing trends in crop losses is complicated by a major expansion of the federally subsidized crop insurance program, as a consequence encompassing more marginal land. Recommendations concerning how the current methodology can be improved to increase the quality of the billion-dollar disaster dataset include refining the factor approach to more realistically take into account spatial and temporal variations in insurance participation rates.