‘Barton Keyes’ is a pseudonym (which I picked) as the insurance industry insider who penned this article needs to remain anonymous. This article, which tells of how insurance companies will raise prices because of exaggerated, unrealistic threats, deserves wide circulation.
It has become commonplace to hear dire predictions about earth’s fate if mankind does not do something to stem the increasing threat of climate change. Climate change is predicted to cause massive destruction to the natural environment, damage health, shorten human lifespans, and to be a threat to national security. Calls to stop climate change have been made by the United Nations, corporations, environmental groups, and even the Pope.
The insurance industry has not been given a pass when it comes to doing their part to combat climate change. I work for an insurance company and recently participated in a meeting where our chief pricing actuary shared that he has been asked by regulators to explain what we are doing to account for the increased risk of loss due to climate change. This immediately caught my attention and I began to do some research on the topic which I would like to share with you.
The best single source I found is the “Insurer Climate Risk Disclosure Survey Report & Scorecard: 2014 FINDINGS & RECOMMENDATIONS” (from now on I will call it “the report”) which discusses the state of U.S. insurers’ preparedness for the expected consequences of climate change. The report was released by the Ceres organization that describes itself as:
Ceres is a nonprofit organization advocating for sustainability leadership. It mobilizes a powerful network of investors, companies and public interest groups to accelerate and expand the adoption of sustainable business practices and solutions to build a healthy global economy. Ceres also directs the Investor Network on Climate Risk (INCR), a network of over 100 institutional investors with collective assets totaling $13 trillion.
The report is a cornucopia of information about not only what is happening in the U.S. insurance space but also what is happening internationally. It answered my questions and left me concerned. Along with other similar organizations, the Ceres organization is absolutely convinced that man-made climate change is occurring and recommends a series of invasive and expensive solutions.
My first question was: which regulators are pushing our chief pricing actuary to describe how we are accounting for climate change? Page 4 of the report provided me with the answer:
This report summarizes responses from insurance companies to a survey on climate change risks developed by the National Association of Insurance Commissioners (NAIC). In 2013, insurance regulators in California, Connecticut, Minnesota, New York and Washington required insurers writing in excess of $100 million in direct written premiums, and licensed to operate in any of the five states, to disclose their climate-related risks using this survey.
There were five states requiring this information last year and by now there may very well be more requiring the survey be filled out. Please notice that there are no weasel words in that paragraph, these state regulators believe that climate change is happening and want to know what we are doing about it! Their certainty is addressed on page 3 of the report:
However, much of the insurance industry is still lagging on this important issue, particularly those in the Life and Annuity and Health sectors—and they cannot afford to. If 97 percent of our actuaries concluded there was going to be a decline in public health due to a medically identified epidemic, we would expect the firms we regulate to adjust their forecasts, premiums and policies accordingly. Failing to do so would be imprudent. With climate change, 97 percent of scientists in the field agree that it is a reality and are more focused on the timing and magnitude of changes and related damage we can expect. This industry should be focused less on what is causing climate change and more on how we respond to and mitigate it.
This is the famous 97% consensus statistic about climate change. I have never been a fan of “consensus science” which is an oxymoron to me. Wasn’t the phlogiston theory of combustion the consensus at one time? It was also completely wrong. However, even those people who put some credence in scientific consensus should know that the 97% consensus statistic has been debunked (please see “Cooking stove use, housing associations, white males, and the 97%” by José L. Duarte for the details). There is no 97% consensus! [Editor: also see the original papers debunking this; here and here.]
Evidence to the contrary notwithstanding the 97% consensus concerning climate change is the justification for the remainder of the report. The following sections provide the survey questions, how those questions were analyzed, and action items for U.S. insurers and regulators. Discussion of three broad insurance segments is provided: Property & Casualty Insurance, Life & Annuity Insurance, and Health Insurance. If you are a glutton for punishment I recommend that you read the report. However, for those of you who would like to spend you free time doing something else here is the short version:
- Due to increased severe storms and sea level rise there will be massive property damage going forward. Property & Casualty insurers are doomed unless we do something!
- Due to increased drought and environmental degradation there will be a lot more sick people. The Health insurers are doomed unless we do something!
- Due to losses in the financial markets (due to climate caused destruction of property) and the increase in disease in the general population the Life & Annuity insurers are doomed unless we do something!
Those few insurers taking climate change seriously are mentioned by name and congratulated in the report.
I want to point out that it is the view of the report writers that the cost of all insurance will dramatically increase due to climate change. It would be nice if the report’s writers were advocating that all insurers increase premiums to account for this and leave it at that. That way I might get some really fat bonuses for doing my part to stem the looming climate change disaster. Alas that does not appear to be the intent. The intent is to use that extra premium money for mitigation such as working with state and local governments, and not-for-profit organizations like Ceres, to prepare for the coming disaster. Oh well, in the event of massive increases in insurer profits the U.S. Congress would probably pass a “windfall profits tax” on the insurance industry. So my dreams of purchasing a yacht have slipped by once again.
An example of the potential cost impacts of the report’s recommendations can be seen if we unpack this recommendation from page 52:
Integrate Climate Change Considerations Into Catastrophe Models
As the end-users of catastrophe model software, P&C insurers should ensure that the latest climate science and projected climate impacts are being taken into account and modeled appropriately by their vendors. Accurately communicating the risks associated with climate change through pricing and underwriting is essential, and accurate catastrophe modeling is crucial in this regard.
To someone outside of property insurance this may seem innocuous enough but it isn’t. To increase the modeled losses due to hurricanes based on “projected climate impacts” will have serious consequences. Several years ago one of the leading vendors of catastrophe modeling software, Risk Management Solutions (RMS), released an updated hurricane model that increased modeled losses. The excellent article “Catastrophe Modeling: Why All the Fuss?” summarizes the effects of these changes as:
[The model update to] RMS v11 has been considered to be the equivalent of a $25 billion to $35 billion capital event in the property market, which in turn has led to an increased cost of doing business in CAT-exposed areas as insurers need to maintain higher capital adequacy ratios as measured by the rating agencies. This has led to carriers raising more capital, raising premiums, reducing their portfolio accumulations in high CAT areas, and/or purchasing more reinsurance.
The Ceres report talks about the impact of climate change in cataclysmic terms. If their projected climate impacts are incorporated into catastrophe modeling software I am confident that the change will cause much more than a “$25 billion to $35 billion” capital event in the property insurance market.
Many of the report’s recommendations will have effects similar to the catastrophe model recommendation mentioned above: to increase cost and decrease supply of insurance products. Implementing these recommendations will affect every person and business in the United States. Unless there is true scientific evidence (the debunked 97% climate change consensus statistic does not count as scientific evidence) our society should not misallocate so many resources in the name of climate change mitigation.