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.”
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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.
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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.
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Read more: http://www.berkshirehathaway.com/letters/2015ltr.pdf
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.
“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, ”
Well there you have it. Straight from the mouth of a California political appointee.
Absolutely no one knows 1) what impact humans have on the climate (versus natural variation) and 2) whether warming is good or bad for us—my suspicion is that a warmer climate is good for us.
Humans have survived by adapting to a changing climate. As for insurance, I think the normal—provable—factors should apply, and the alarmists have repeatedly proven themselves NOT to know the future.
Good insurance practices: Factor is risk for proven risk, things like building on the shoreline in an area which repeatedly floods, or is subject to periodic hurricane damage.
Bad practices: Government filling in with federal insurance where the private insurers will not insure. This leads to bad practices, and eventually bad outcomes. Then they repeatedly help people rebuild in places proven to be too risky. What we DO know is that politicians have no clue about how to factor in appropriate risk—or about anything else for that matter.
Most homeowner’s property casualty policies exclude flood damage (Harvey in Houston). If you want flood coverage it has to be purchased from the federal government (probably subsidized by the rest of us). If you have a mortgage and you are in a flood zone, your mortgage company will probably require flood insurance.
I work as an underwriting manager in an insurance company and I can assure you that climate change is not built into our rates as we need to remain competitive in the marketplace.
Rather our rates are set on hard data largely relating to previous claims experience of which weather (not climate) is but a single minor component.
There is certainly plenty of “talk” across the industry in Australia about how claim costs “might” be affected in future years but in the absence of hard evidence of increased claims costs most insurers have not and will not move. In this market any insurer charging higher rates due to climate change would quickly see their share of the market erode.
The biggest concern for most motor insurers is the shift towards driverless cars. Because of the manner of their phased introduction into our society, insurers will have a difficult time trying to maintain an accurate measure of their expected claim costs for at least the next 10-20 years.
The lawyers are going to make heaps in relation to claims involving driverless cars.
Any evidence driverless cars do or will kill and maim any more people than manned vehicles?
Companies have been warned about the cost of not considering climate change. By no less an authority than the Bank of England.
When it comes to science, Australian politicians have their heads up their jacksies. So no leadership there. Eh.
Stephanie, when you ask “Any evidence driver-less cars do or will kill and maim any more people than manned vehicles?” The answer is probably probably “no, there isn’t currently evidence as there are not sufficient driver-less vehicles on the road to provide a statistically valid data sample”.
However, I think your asking the wrong question.The question is what difference in risk is there between driver-less and non-driver-less vehicles and how effectively will insurers be able to accurately measure that risk in the face of constant change in order to price their products appropriately.
You might disagree but I can tell you insurance companies face significant challenges in responding to the pace of change in relation to use of driver-less vehicles. Having said this, Uber and other poorly regulated ride-sharing companies certainly represent a more immediate challenge. Climate change is a long last and for most companies would barely even be on the radar for the actuaries who help set the pricing.
Any insurance companies in Australia (and elsewhere in the world) pricing climate change into their policies will lose market share at least for the foreseeable future. Until climate related losses (should they exist) are realized, accurately identified and modeled they will not be incorporated into insurance rates and pricing strategies.
BTW I can tell you one insurer which has been offering an insurance product which included a carbon offset on their motor product at a very small additional premium (which is put towards planting trees) is now discontinuing that product as there was simply no demand for it.
Be more critical in your thinking! Just cause the Bank of England says something does not make it true!
I would regard the BoE as an authority in financial matters. Your insurance companies ignore its warnings at their peril.
I wouldn’t trust any of Australian politicians in government, but I suspect they reflect the Australian electorate. Good luck with worsening heatwaves and fires as global warming continues unabated. It’s going to hit Australia very hard.
I’m not an Aussie myself, but I’ve spent a lot of time there, most of it in the bush, and I am going to tell you something:
Australian bush always will burn sooner or later. Always.. And it is much preferable for humans that it happens sooner rather than later. The aborigines figured this out about 40,000 years ago, as shown by the amount of charcoal in lake deposits. The current fire-suppression policies which prevent planned burns and effective firebreaks around settlements are insane. And the problem is exacerbated by the shift from european to australian plants in parks and gardens.
Stephanie I think you’ll find most Australian insurance companies don’t set their rates based on blind ideological thinking such as yours. Quality modelling based on hard accurate unadjusted data is king.
Something a few climate scientists and those who follow in lockstep without exercising a single critical thought of their own are unlikely to ever learn.
In fact if insurance companies used modelling of the same sort of quality as used by climate scientists most would go broke.
Incidentally, the day I arrived in Australia in 1974 with my family having emigrated from the UK, there were severe bushfires all along the highway as we traveled from Sydney airport to our new home. Earlier in the year, in January 1974, Brisbane was hit with the worst floods it had faced since the 19th century and then on Christmas eve Tropical Cyclone Tracy flattened Darwin.
You might rope in young people with stories of worsening heatwaves and fires but those of us who have been around a while are not so easily fooled. The only thing hitting Australian’s “very hard” are the increased costs of living arising from pointless efforts to fight an issue that doesn’t exist.
This strikes me as an odd tactic, the “greens” are trying to enact additional fees or costs everywhere they possibly can. As a consumer when I see these fees in the future am I more likely to see them and change my behavior or just accept them as a part of buying the product I want?
If the cost is spread out across a dozen different areas of my life I am less likely to notice the cost to my wallet and therefore less likely to change my behavior. If they focused on increasing the costs of just one area, such as gasoline taxes, then I will probably not drive as much or at least buy a smaller car with better MPG than my truck.