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How can the insurance industry insure itself against global warming?

February 18, 2014

Today, the UK government will hold talks with the insurance industry. The subject is, of course, the terrible flooding we’re experiencing here in Britain, the costs and damage done, and what responses we might expect from insurers.

These ‘summits’ will become more frequent, and more fraught, as time passes. The insurance industry rarely faces such a difficult assessment of risk, and notably exclude the most chaotic circumstances e.g. war, since it isn’t possible to determine a realistic premium when the potential losses are incalculable.

For some time, the insurance industry has been ahead of most other sectors, factoring in climate change to their long term risk assessments for reasons that are now become more obvious by the day. Munich Re – one of the world’s largest re-insurers (underwriters) were one of the first to warn of the dangers climate change could pose – as early as 1973!

Here’s a current quote from their website:

Catastrophe losses have vastly increased for insurers in recent decades, five out of six natural catastrophes being triggered by weather extremes. These developments have prompted the need for a re-analysis of the risks posed by weather-related hazards in Europe.

Source: Munich Re: Climate change in central Europe

This view is shared by the World Bank. In a November 2013 article entitled “Weather-Related Loss & Damage Rising as Climate Warms“, they cite Munich Re figures:

Weather-related losses and damage have risen from an annual average of about $50 billion in the 1980s to close to $200 billion over the last decade, according to the Munich Re insurance group.

If this convergence of influences has not done so already, the risks and costs of unmitigated climate change will lead quite soon to a strange confrontation between powerful financial groups whose interests are inextricably entwined, but increasingly paradoxical; across the financial sector insurance, pension funds, investment houses, banks and other institutions will be obliged to consider ever more critical views of the fossil fuel industry’s funding of climate change denial, despite so many investments and so much money being made from the very thing that’s causing the losses – the burning of fossil fuels. (One suspects the divestment of stranded fossil fuel assets will also feature heavily).

These, and other, powerful business lobbies will find their financial affairs becoming more and more destabilised. In every case it will be shareholders or investors who demand answers, recompense, or revenge, but it will be in the private meetings, on the golf courses and in the exclusive resorts, where the captains of industry will start looking at each other with growing suspicion. Who is it causing my losses? Who can we blame at the next shareholder meeting? Can we sue the Koch Brothers, Murdoch, Fox News, Inhofe, Lawson, Heartland et.al? (This last, in a country like the US where litigation is ubiquitous, is not an improbable scenario by any means).

Meanwhile, the governments of the day will remain answerable to an increasingly fractious electorate whose ideology will end up taking second place to the immediacy of climate change induced loss – of property, jobs, and safety. We will try, unreasonably, to blame the insurance industry for refusing to underwrite risks that are clearly unprofitable (damn capitalists!). The government will have to step in, as they did with the banks, taking on a role that will divide the ideologues, perhaps by offering some kind of state insurance to those the industry refuses to cover  (damn socialists!).

The costs to us all, to industry, to the exchequer, to the global economy, will increase at a rate commensurate with the melting ice, the storms, the droughts and the concomitant agricultural failure. Perhaps then will the stupid arguments about climate change stop, brought to an end not by science, nor evidence, but simply by the sheer cost of the damage it’s doing.

This is horridly logical; most contrarian arguments about climate change are economic. When the costs of inaction become undeniable, contrarian arguments will flounder: deniers can obfuscate about science all they like, but when farmers’ crops fail, when you can no longer afford to insure your home, when climate change hits your wallet hard – no amount of demagoguery will convince you that the whole thing’s a charade. Perhaps then we might find a collective reason to work together, to put aside ideology and nationalism, and stop destabilising our climate.

The melting ice is our environmental early warning system. It attests to the on-going process of climate change (and do take a moment to consider how, if there’s been a ‘hiatus’ in warming, just why the ice is melting ever faster. Does that sound logical to you?). The insurance industry could be considered a commercial ‘canary in the coal mine’. Just as the melting ice is the precursor to widespread environmental destabilisation, so too is the insurance industry one of the first to pay the climate change bill for damage done that many thought would not arrive until mid-century.

We can deny anthropogenic climate change all we want. That isn’t going to stop the ice melting, nor stop the flooding, the droughts, the fires and storms. What we will be unable to deny will be the invoice that accompanies our intransigence, the mounting costs of our complacency. Many of us wonder frequently what it will take to bring governments to their senses and do something about climate change. The answer, as ever, is monumental financial loss, and it doesn’t look like we’re going to have to wait very long for that disaster to be part of the present, instead of a nebulous threat to our future.

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One Comment leave one →
  1. February 18, 2014 1:24 pm

    There will be burdens on the consumer – in the UK premiums will go up very soon. The “Statement of Principles Agreement” that limited what the insurers could charge to cover flood risk to private property expired in June 2013. Nothing has replaced it as yet, so properties at risk of flooding have no limit now on what their insurance premiums can be hiked up by. Details here:
    https://consult.defra.gov.uk/flooding/floodinsurance

    If, as is projected extreme events become more frequent, there’ll be more people claiming and the industry will seek to recoup costs.

    As I am currently involved with an insurance claim (boiler flooded utility) its something I am keeping an eye on ! It doesn’t help that for the first time in 14 years my patio doors leaked and nearly damaged the carpet. :-/

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