Market, Politicians Going Separate Ways on Climate Change: View
Hurricane Irene’s residue is likely to include a confusing debate over whether insurers or property owners are responsible for storm-caused water damage. There’s no lack of clarity, however, over whether the insurance industry believes in climate change and its ties to lethal weather: It does.
As Bloomberg Businessweek reports in its Sept. 5 issue, the industry has absorbed many lessons from Sept. 11 about anticipating risk. One is that the recent spate of weather extremes is likely to continue -- and the insurance market must reflect that.
Interestingly, this puts the industry at odds with a number of Republican candidates who have made questioning climate change a not-insignificant part of their campaign strategy. Rick Perry and Michele Bachmann dispute whether global warming is man-made. Perry suggests that climate is affected by many variables, which scientists can manipulate “so that they will have dollars rolling into their projects.” Mitt Romney is on the fence. Only Jon Huntsman Jr. has declared definitively that he trusts scientists on global warming.
Politicians have been known to dissemble about risk because voters generally don’t like to hear bad news. The insurance industry makes its money telling it to you straight -- how long you’ll probably live, what price your home will fetch, whether to repair or trade in your car.
For this reason, it’s worth noting that insurers already factor climate change into their models for measuring, pricing and distributing risk. Insurers have no incentive to lie. If they are more scared than they should be in pricing risk, shareholders will punish them. If they aren’t scared enough, nature will do the job.
No one can say for certain that any single weather event flows from the warmer air caused by carbon emissions, which in turn lead to more rainfall, floods and snowfall over some parts of the planet, and more drought in other parts. But last year was the hottest on record. Arctic ice is at record low levels. Regardless of what politicians say, insurers must factor all this into premiums.
Swiss Re, the second-largest reinsurer, is developing scenarios using probabilistic modeling to help government officials cope. The reinsurer studied the effects of climate change in vulnerable areas such as Samoa, Mali, Caribbean islands and Miami.
No matter which model it chose -- no change, moderate changes or extreme changes -- Swiss Re concludes it’s cheaper to adapt now than to sit and wait.
It recommends building codes that require more water- and wind-proofing, zoning laws that prevent planting trees close to buildings and power lines, redesigned beaches that absorb storm surge, and restoration of wetlands.
Hurricane Irene, and the estimated $5 billion to $7 billion in damage claims insurers now face, has been swept up in this debate. Irene maintained hurricane strength farther north than storms usually do -- and dropped extraordinary amounts of rain. At the same time, parts of the U.S. are experiencing record-high temperatures and dust-bowl conditions. Houston hit an all-time high of 109 degrees Fahrenheit (43 degrees Celsius) the same day Irene was roaring up the Eastern Seaboard.
A storm with Irene’s fury will only cause more damage in the future. Rising sea levels will allow storm surge to penetrate farther inland. Americans pushing relentlessly toward the East and West Coasts are putting themselves and their property in harm’s way.
If elected officials want to help constituents prepare for disaster, they could fight for legislation to curb carbon emissions, and they could keep people from building along coastlines. Politicians have enjoyed enormous success calling scientists into question. The market may not prove to be such an easy target.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at firstname.lastname@example.org.