Paying the climate change premium

Ready to have your insurance rates go up? That’s what one industry group says will happen as climate change disrupts the world’s weather.

The Association of British Insurers said the cost of flood and windstorm damage would rise for insurers as global temperatures increased.

This would lead to higher premiums for consumers and a restriction of cover as insurers would need more reserves.
…
“These findings have serious implications for insurers, householders, businesses and governments,” said Nick Starling, the ABI’s director of general insurance and health.

“The continued widespread availability of property insurance in the future depends on taking action now to manage the threats of climate change.”

We normally think of the insurance industry as conservative, but when it comes to climate change, it’s been extremely aggressive. After all, that’s what the insurers do: analyze and seek to minimize risk–and global warming has made them increasingly worried about their bottom line. In fact, it’s the industry’s very conservativeness that made it one of the first to bang the drum about the perils of a warming world.

For example: Swiss Re, the world’s largest re-insurer, keeps three climatologist on staff. It has tracked rising damages from natural disasters for decades. Something like 20 years ago, it released its first report warning of the road that lay ahead. The graph up above is from a report they released on the future impacts of climate change.

This is also a good occasion to refer to my book on the consequences of climate change, where I devote a chapter to the insurance industry, and explain its role in transmitting the cost of climate change to consumers.

“The whole underpinning of what insurance is about is that the past is an accurate predictor of the future,” said [Chris] Walker, now the North American director of the Climate Group, a coalition of businesses and government that works for action on global warming. “And if it’s no longer an accurate predictor—because climate has changed—then you’re in trouble. You don’t know what a good price for housing insurance in Key West is anymore. Is a one-in-a hundred-year event now one in fifty? One in twenty? One in ten?

“If it was a linear movement—one degree rise will equal one more storm—you could calculate and probably it would be an actuarial dream,” said Walker. “But it’s not. In 2007, Florida had a major fire during the rainy season in every single county simultaneously. That’s pretty weird. I don’t think of Florida as being a dry place subject to forest fires. That’s out west. That’s California. I always say ‘climate change’ as opposed to ‘global warming.’ Because it’s going to be warmer some places. It’s going to be cooler some places. Some places will have more rain. Some less. If climate change changes the data that you’re relying on as an insurer, then how do you price? How do you model?
…
The world has not yet put a formal price on carbon. Drivers don’t pay at the pump for the expected impact of their commute. Nor do we factor the future damage from running air conditioners, lighting, and kitchen appliances into our electricity bills. Yet global warming does have a cost, one that for the moment is monetized only in higher prices for certain types of insurance. If rising rates near the water reflect a world made riskier at least in part by climate change, then communities like Key West and New Orleans, and all those up and down the Atlantic and Gulf coasts, have begun paying for the world’s emissions.