Risky business: insuring against climate change

By Bryan Walker 28/06/2011

Thumbing idly through last Friday’s Business Herald lift-out, I clicked to attention at a double page spread headed Climate of Fear reporting on how seriously the insurance industry is taking climate change. Peter Huck’s article didn’t appear on the Herald website for a few days, but it’s there now, I’m glad to report.  It’s a thorough and scientifically aware piece of journalism which it was pleasing to see given prominence in the paper. And no, he didn’t go looking for any obliging deniers to balance the concern of the insurance industry.

How do insurers calculate their exposure, as ’hundred year’ weather disasters become ever more common in the ’new normal’?  Getting a handle on it means taking climate science very seriously. And the news on the science front is not good, as he briefly recounts.

For those in the risk management business, simply denying climate change is not an option. Floods, hurricanes, drought, all mean payouts, and if insurance companies haven’t had premiums in line with the level of risk they’re in serious trouble.  There is growing consensus in the insurance industry that the warming climate is amplifying precipitation and floods.  The questions the insurers have about this are consequential. How soon? How much? And how to respond?

Huck refers to German reinsurer Munich Re’s disaster database which notes losses from weather-related catastrophes rose ’by a factor of three’ from 1980 to 2009, from some 130 events a year in the 1980s to over 350 a year today. He sees a similar trajectory in New Zealand where Insurance Council figures, excluding the Christchurch earthquake, record 36 natural disasters during the 1990s costing $214 million, rising in the following decade to 57 episodes costing some $630 million. Aggregate costs rises can be partly driven by higher property values and more people living in vulnerable areas, but Munich Re considers it likely that the growing number of weather-related catastrophes can only be explained by climate change.

One response of insurance companies is to deny insurance or to substantially increase premiums in places deemed to be at high risk, and Huck gives examples from the US such as Allstate, one of the major US insurers, saying that climate change prompted it to cancel or not renew policies in many Gulf Coast states. He couldn’t get comment from the NZ Insurance Council as to the likelihood of coverage denial in this country, but there has been news in the last day or two that the Christchurch City Council is in difficulty finding new insurance cover for the city’s assets. Not a climate change matter, but nevertheless an example of the realities which insurance companies don’t have the option of ignoring.

Huck surveys the possibilities of increasing difficulties in insurance purchase for homes and businesses located on a floodplain already battered by a weather-related disaster, or threatened by tidal surges which may intensify as sea levels rise due to climate change. The latter has major implications for many low-lying coastal communities, including, he points out, Auckland.

I was reminded of reference to insurance of coastal properties in several of the books I’ve reviewed on Hot Topic. Stephan Faris in Forecast wrote of the South Florida Coast among other places and described the very sharp rise in insurance premiums and refusals to offer insurance coverage. He quotes the blunt remarks from one company: ’We believe what the scientists are telling us…We believe it would be bad business to continue to add to our risk.’  Faris comments that while the world has not yet put a formal price on carbon, the cost of global warming is beginning to be monetized in higher insurance prices. Orin Pilkey and Rob Young in The Rising Sea record that government doesn’t necessarily take a hint from insurance companies. They say that Florida extraordinarily still permits the construction of high rise shoreline buildings, itself taking over the financial obligation since insurance companies have backed away from insuring coastal properties. Mark Hertsgaard in Hot describes the state’s assumption of that responsibility as insurer of last resort as ‘monumentally risky’.

Huck’s article notes that the insurance industry engagement with climate change has been more than avoidance of too much risk.  He refers to two substantial and important papers in the insurance world which consider positive contributions the industry can make to mitigation and adaptation. I’ve had a look at them, and been impressed by their understanding of the science and their desire to see insurers play an active part in fighting climate change. One, The Insurance Industry and Climate Change is a 2009 report from the Geneva Association, a research think tank for the industry. Its many positive suggestions in conclusion include investing in clean energy projects. It speaks of the industry moving from being a passive climate change sufferer that has to sustain some very expensive consequences to becoming a proactive shaper of the future.

The other report is From Risk to Opportunity 2008: Insurer Responses to Climate Change. It was commissioned by Ceres, the American network of investors and environmental organisations which addresses sustainability challenges, and written by Evan Mills, of the Lawrence Berkeley National Laboratory. It details many steps taken by insurance companies to engage with what are recognisably constructive engagements with climate change solutions and sets out how companies can best move towards best practices. The President of Ceres in his introduction sums up the intention:

’Climate trends are creating risks on both sides of the insurance house–underwriting and investment. But these trends also create vast opportunities, from product innovation to investment alpha, for insurers to be part of the global warming solution.’

To return to Huck’s article: he concludes that insurers are grasping the nettle of climate change and speculates that governments might even follow suit. I think that depends on when the so-easily-distracted politicians read the signs that the insurance industry is putting out. They’re really the same signs as the scientists, and they’ve got urgent written all over them.

The best insurance against sea-level rises, storms, floods, droughts and heat waves would surely be for the world to set a target of no more than 1.5 degrees warming. It would also be the cheapest insurance on offer in spite of the speedy re-orientation of economies it would require. UN climate chief Christiana Figueres may have upset negotiators recently when she called for a lowering of the target from the current 2 degrees, but she’s telling the plain truth.

Any chance of New Zealand, newly alerted to the cost of natural disasters, joining the small island states and many developing countries in urging that lower target in international forums and pushing the domestic changes required to match it? We can’t stop earthquakes, but we can support a genuine effort to contain human-caused global warming.