Monday, October 26, 2015

Testing the mood of insurance companies against Climate Change

Watching the past and present ‘behavior’ of the stock market then trying to predict its future behavior is (without trying to sound hyperbolic) mindboggling difficult. Lots of bucks along with much expert and non-expert prognostications go into predicting the market, which seems hell-bent on being unpredictable. Searching for a successful formula to make a profit on the market is like trying to cheer up a moody adolescent with candy. It could work, but I wouldn’t bet on it.

Like the stock market, which tries to predict the future of wealth, insurance institutions try to predict the future of financial risk. That’s why I find this new study-- Economic losses from US hurricanes consistent with an influence from climate change, in Nature Geoscience--so interesting. The author of this study claims that insurance losses due to hurricanes mean that Climate Change is sending us a clear message.

“The study claims that the extra costs in recent decades do not just stem from more homes, businesses and infrastructure that have been built near the coastlines. "Increases in wealth and population alone cannot account for the observed trend in hurricane losses," according to the study, whose lead author is Francisco Estrada, an economist at Mexico's National Autonomous University. Estrada and two colleagues from Europe said that this unexplained increase in economic losses over time is consistent with a climate change signal.” (Study: Climate change adding billions to U.S. hurricane costs, 10/19/2015 USA Today)

Actually, what interest me about this study is the media coverage of it. In the USA Today coverage, much of the article concerns itself with reactions to the study, including a naysayer who thought the study was ‘flawed’ and ‘misleading.’ An article in Insurance Journal describes the same study without the misleading and flawed parts. The insurance media seems to be embracing the message being sent by the study.

Whether or not, and to what degree, hurricanes are being affected by Climate Change is still being debated by climate scientists. The study above may not turn out to be part of the scientific consensus that Climate Change is sending us a clear message through individual hurricanes. No one study is likely to prove this message because (as Andrew Revkin of DOT Earth likes to continually reminds us), we need to be aware of the “single-study syndrome”, the tendency to think a single study can answer a complex, multi-causal issue.

For our purposes at the moment, if this study is causing insurance companies concerns it should be causing us concern. Whether we, meaning the general public, care to follow the precautionary principle and plan for Climate Change is one thing. But whether we like it or not, the insurance industry must follow this principle or they will go belly up. As a matter of fact, the insurance industry worldwide is very concerned about Climate Change:

“Hurricanes, floods, fires, and heat waves resulting in millions of dollars of damage are no longer unusual events. They are now a fact of life, posing increased risk to life and property while driving up the costs of recovery. Both catastrophic and smaller-scale floods have been on the rise in communities throughout the country. The Western wildfire season has grown longer as warmer temperatures and longer periods of drought have become more common, and tropical storms and hurricanes have brought catastrophic damage to the U.S. over the past two decades. Disasters with a price tag exceeding $1 billion, previously limited to one or two per year, now occur at least five to 10 times per year. Recent payouts for events like Superstorm Sandy have shattered previous records, taking a toll both on the federal budget and on the National Flood Insurance Program, which is now more than $23 billion in debt. As the frequency, severity, and cost of these disasters grows and federal spending on recovery rises, individuals, communities, and state and local governments must do everything possible to ensure they can withstand the next storm.” Bracing for the Storm, How To Reform U.S. Disaster Policy To Prepare For A Riskier Future, Produced by SmarterSafer, April 2015

You can argue all day long with climate deniers and even climate scientists (if you don’t mind looking foolish), but you cannot argue with the insurance industry. If they feel the need to raise your premiums or drop you altogether because they think they need to get their funds ready for Climate Change, then you either pay up or go without insurance. The insurance business is not in the charity business.

The slightest wiggle will send the stock market soaring or plummeting, whether the wiggle was a result of rational or an irrational exuberance. Similarly, if the insurance industry thinks it’s going to be bleeding money profusely in the future because a study links insurance payouts with hurricanes, everyone should listen. Especially the media.

When the media covers climate studies and the insurance industry’s reactions, reporters should first test the mood of the insurers before scouring the Internet for a climate doubter to get the measure of the report’s importance to us all. How the insurance industry is feeling about humanity’s preparations for addressing Climate Change and the financial liabilities the insurance industry thinks that they may be held accountable for is probably a more sound form of feedback for the public rather than a single critic’s opinion about how a single study was conducted.  

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