Guest essay by Eric Worrall
If you thought the job of insurance companies is to charge customers a competitive fee to cover insured risk, you’re sadly mistaken. According to regulators and influential green groups, insurance companies should be investing more of your insurance premiums into their green business ideas.
Insurers Will Be Hard-Hit By Climate Change But They’re Not Investing In The Low-Carbon Economy
Mike Scott, CONTRIBUTOR
MAY 31, 2018 @ 10:00 AM
The insurance sector is on the front line of the battle against climate change – it is having to pay out more to policyholders as extreme weather events such as flooding, droughts, storms and heatwaves become more frequent and more severe.
At the same time, as some of the biggest investors in the world, insurance companies also face significant losses as climate change hits the companies they invest in. “Climate change poses risks for insurance companies, so do responses to it by markets, businesses, consumers and governments,” says Dave Jones, California’s Insurance Commissioner, in a new report by the Asset Owners Disclosure Project (AODP), which sees itself as the world’s benchmark of climate leadership in the investment system.
“The impacts of climate-related risks are a growing reality for the insurance sector. This reality has key implications for that sector’s valuation,” the report adds. “Weather-related financial losses, regulatory and technological changes, liability risks, and health impacts related to climate change have implications for the business operations, underwriting, and financial reserving of insurance companies.”
And yet the sector is not aligning itself with the emissions reduction targets set out by the Paris Agreement, to limit average temperature rises to “well below 2°C”, according to AODP’s report, Got it Covered? Insurance in a Changing Climate.
The suggestion that insurance companies are at risk because of climate change is false. But don’t take my word for it, the following is an explanation for why climate poses no risk to insurance companies provided by Warren Buffett.
… I am writing this section because we have a proxy proposal regarding climate change to consider at this year’s annual meeting. The sponsor would like us to provide a report on the dangers that this change might present to our insurance operation and explain how we are responding to these threats.
It seems highly likely to me that climate change poses a major problem for the planet. I say “highly likely” rather than “certain” because I have no scientific aptitude and remember well the dire predictions of most “experts” about Y2K. It would be foolish, however, for me or anyone to demand 100% proof of huge forthcoming damage to the world if that outcome seemed at all possible and if prompt action had even a small chance of thwarting the danger.
This issue bears a similarity to Pascal’s Wager on the Existence of God. Pascal, it may be recalled, argued that if there were only a tiny probability that God truly existed, it made sense to behave as if He did because the rewards could be infinite whereas the lack of belief risked eternal misery.
Likewise, if there is only a 1% chance the planet is heading toward a truly major disaster and delay means passing a point of no return, inaction now is foolhardy. Call this Noah’s Law: If an ark may be essential for survival, begin building it today, no matter how cloudless the skies appear.
It’s understandable that the sponsor of the proxy proposal believes Berkshire is especially threatened by climate change because we are a huge insurer, covering all sorts of risks. The sponsor may worry that property losses will skyrocket because of weather changes. And such worries might, in fact, be warranted if we wrote ten- or twenty-year policies at fixed prices. But insurance policies are customarily written for one year and repriced annually to reflect changing exposures. Increased possibilities of loss translate promptly into increased premiums.
Think back to 1951 when I first became enthused about GEICO. The company’s average loss-per-policy was then about $30 annually. Imagine your reaction if I had predicted then that in 2015 the loss costs would increase to about $1,000 per policy. Wouldn’t such skyrocketing losses prove disastrous, you might ask? Well, no.
Over the years, inflation has caused a huge increase in the cost of repairing both the cars and the humans involved in accidents. But these increased costs have been promptly matched by increased premiums. So, paradoxically, the upward march in loss costs has made insurance companies far more valuable. If costs had remained unchanged, Berkshire would now own an auto insurer doing $600 million of business annually rather than one doing $23 billion.
Up to now, climate change has not produced more frequent nor more costly hurricanes nor other weather- related events covered by insurance. As a consequence, U.S. super-cat rates have fallen steadily in recent years, which is why we have backed away from that business. If super-cats become costlier and more frequent, the likely – though far from certain – effect on Berkshire’s insurance business would be to make it larger and more profitable.
As a citizen, you may understandably find climate change keeping you up nights. As a homeowner in a low-lying area, you may wish to consider moving. But when you are thinking only as a shareholder of a major insurer, climate change should not be on your list of worries.
Could Warren’s explanation be simpler? He is not rejecting the possibility that climate change will cause more weather related disasters in the future, what he is saying is increased risk would drive greater demand for his insurance products – people would be willing to pay the higher premiums required to cover the increased risk.
If climate change causes more weather disasters, Warren Buffet’s insurance business profits will increase.
Greens were furious with Warren’s climate heresy, in my opinion because Warren Buffett’s dismissal of their false climate insurance narrative undermines their efforts to get their hands on more of your money.
But Buffett’s skepticism hasn’t stopped greens from advancing their plans. My prediction, California at least is building towards forcing financial institutions to invest part of your money into green businesses.
The least worst outcome of such coercion would be a green surcharge on all insurance premiums, as greens do to insurance premiums what they have already done to retail electricity prices in Europe and other places.
The worst case, if a substantial sum of money coercively invested in all these wonderful green ideas evaporates like a bad subprime mortgage, might be a new global financial crisis.