Climate Change Experts Explain to Insurers They Don’t Understand Risk

Guest essay by Eric Worrall

You might think business stars like Warren Buffett have some idea of how to run an insurance company. But climate experts keep trying to explain that the focus insurers have on observational evidence is leading to insurers underestimating the risk of climate disasters.

Insuring your home may get harder and more expensive as climate change increases risks

ABC Radio National / By Antony Funnell for Future Tense

Our homes have become sanctuaries — places of refuge in the time of coronavirus. But they can’t protect us from all threats.

Analysts say the houses we’ve built, and where we’ve built them, could increase our future vulnerability as we face the ongoing effects of climate change.

With increased damage to houses through catastrophic fires, floods and other disasters, the global insurance market is under increasing stress, and there are fears whole communities could become impoverished or homeless.

Experts doubt industry players and governments have fully come to terms with the issue — and they worry about some of the financial mechanisms insurance companies have put in place to share the risk.

Too focused on past catastrophes

Insurers have a short-term focus and often fail to be proactive in assessing future problems, according to Jason Thistlethwaite, a Canada-based academic and expert on insurance practice.

He says while global climate models are forward looking, the actuarial practices used for risk modelling in the insurance industry are not.

Put bluntly, insurers still spend most of their time looking in the rear-view mirror.

Read more: https://www.abc.net.au/news/2020-05-14/home-insurance-as-climate-change-and-disasters-affect-industry/12227466

Note the article mentions that there is some movement in the reinsurance market.

Why aren’t insurers more concerned about climate risk? The best answer is something Warren Buffett said in 2015.

… 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.

Source: https://www.berkshirehathaway.com/letters/2015ltr.pdf

As far as I know Buffet’s views on climate change have not changed significantly since 2015, I could not find a mention of climate change in his 2016, 2017, 2018 or 2019 letters.

For some reason the fact insurers like Buffett don’t think their businesses are in danger really seems to upset climate alarmists.

Buffett is not a climate skeptic, he takes climate change very seriously. In 2006 Buffett gave $31 billion of his own money to the Bill and Melinda Gates Foundation. The foundation spends significant time and capital on climate issues.

But alarmists can’t seem to accept Buffett’s detailed explanation of why insurance companies are capable of absorbing sudden changes in costs, and why if climate risk rises, Buffett’s profits will actually increase; they keep insisting that insurance executives are getting it wrong.

60 thoughts on “Climate Change Experts Explain to Insurers They Don’t Understand Risk

  1. If there was zero risk from climate impact of damage to your property, you wouldn’t bother with insurance.
    As long as premiums are sensible, there will always be people who are willing to take a risk, in order to reap the benefits of living in potentially dangerous areas.

    • BDTP, I agree with your general direction, but, is there not a larger question; one which, in more simple terms, was raised in the Buffet excerpt?

      Without getting a good ESTIMATE of UNCERTAINTY … how does one know how much to RISK?

      In your example, the RISK is the house — that is one’s exposure — but, when one wants to get insurance … one wants to know “in the light of What Level of UNCERTAINTY?”

      In climate science — especially, for example, in constructing models — there are very high levels of uncertainty. Is this not the basic reason why in such climate models we have only hypotheses, but, no theories? The uncertainties are too high because we do not understand, sufficiently, all of the responsible forcings. Many are highly speculative and therefore hypothetical [even if there are many who do not, or, will not, recognize that fact].

      At this point in our comprehensive understanding and pursuit of climate predictions, such as they are, we have nothing but hypotheses; which, IOW, means that maybe, in general, things will be warming or maybe things will be cooling. No one with a credible high level of certainty — into the meaningful future — knows which it will be. Currently, we can only hypothesize.

      In view of this FACT, how can anyone justify any nation — the world, for that matter — risking any amount? [Actually, we do know that many national “leaders” are willing, based on political motivations, for their taxpaying subjects to risk much.] IOW, should we risk mountains of CASH on working against global warming, or, should we RISK mountains of CASH against global cooling?

      And, before we do either, do we KNOW, depending upon which may be “most likely” to happen … that we even have a need to mitigate global warming and-or global cooling factors.

      Good GOD Almighty, in terms of understanding the CRITICAL DEGREE of UNCERTAINTY, and, then deciding on how much to RISK, we have that carriage way out in front of the horse; again, IMO, mostly for political purposes.

      We do have some homework to do — way too much of it on the political side — do we not?

      • You obviously didn’t understand what Buffet was saying at all … you don’t need to know the future risk at all not even remotely. Climate change is very very very slow moving and the premiums rise yearly if need, hence it’s not an issue at all and you can just ignore it.

      • While agreeing with ldb, I think quantitative data is very important.
        In my area alarmists have been saying more drought, more bushfires and more floods.
        But how much more?
        Using flooding as an example, if a region is fully flood mapped, we can know exactly which locations will flood.
        The premiums in flood prone areas go up.
        The premiums in non flood prone areas go down.
        The overall premiums go down.

    • I’d sure take the risk of “climate impact” causing any damage. I’d further take the risk of waiting 30 years for you to demonstrate how the climate had “changed”.

      Now weather and various “acts of God” that could impact a property at almost any time, completely different story.

    • The biggest treath to our lives are Human made ideas, ideology. Look what those has done to our lives the last 100 years. Marxism/Socialism, National Socialism, Maoism. etc etc… Those banging on our door now are Neo-Marxist. By politicizing Nature try to bring the Western Civilization down. They just want one thing. A radical change of the Western World.

      • That was a wordpress problem. It got confused about me having a new name and kept sending comments, here and elsewhere, to the naughty step. Pubs here are still shut.

  2. You would think farmers would be first in line to experience climate change being close to weather conditions.

    Year on year farmers are producing bumper and record harvests world wide.

  3. Let’s look at why here in the U.S. most auto insurers have given a credit to driver’s policies due to less miles driven during the lock downs. Are insurance companies just wonderful people who really care? Hell, no. It was competition that caused this. One company, I forget who it was, started this idea to attract new customers. The others followed quickly to stop their customers from switching. The cost of the small rebates given were to be covered by enticing new customers to come on board. The cost of the small rebates given were far less expensive than losing thousands of customers to the competition. Competition will keep premiums reasonable, as long as the company can comply with required reserves.

  4. Yup. The effects of climate change will take years to impact insurance claims and policies are repriced annually. In Georgia auto insurance policies are only issued for 6 months. When I asked if I could just pay the entire annual premium once a year I was told no because if they have to pay a claim, they don’t want to wait more than 6 months to raise the premium.

    So if insurers really start to worry about climate change increasing claims, they will go to 6 month homeowner policies.

    • Exactly. Todays premiums don’t care about next decade or next centuries problems, nor should they as that’s not what they’re there for. Climate Change (regardless of man’s role in it or lack there of) is something that happens over the long term (decades to centuries or more) insurance is priced short term (1 year or less).

      There no reason for insurance companies to price into today’s insurance premiums something that won’t be an issue for years to come. For example, take the “rising ocean”. Flood insurance isn’t particularly worried about a rise in the ocean measured in millimeters in any particular year, but by the time those mm rises add up to become an major issue(*decades* from now, if ever), insurance premium will have naturally factored it in along the way, as it transitions from a non-issue (now) -> to a minor-issue (years from now) -> to a major-issue (decades from now).

      • Yep. How long does an insurance policy last? IIRC, my house insurance is renewed every year. The company can re-assess the risk when things get riskier.

        The problem is that some folks never give credit to other people for their ability to see the glaringly obvious. Teenagers are pretty bad that way. So, apparently, are CAGW alarmists.

    • Yes I think most who understand it, realize even if you accept Climate Change (like Buffet does) it is actually a non issue to insurance because the process is to slow to matter.

  5. So Gate’s and Buffet’s money will joins Ford’s and Rockefeller’s in promoting leftist causes for decades to come, assuming they don’t destroy us.

  6. Might it be the case that the insurers have noticed that the climate models don’t understand the climate?

    • No. It’s that they do accept the worst case scenarios of the climate models as being quite possible but still think that those scenarios aren’t much of a problem.

      The people who know how bad disasters actually are think that we can cope with the worst cases imagined by the Global Warming fraternity. No end of the world. No collapse of civilisation.

      That’s what really annoys the doomsayers. That people who think they are right still don’t think they are important.

    • Oldseadog, basically the insurers noticed that the climate models aren’t relevant to what the insurers do. Insurance (home, auto, flood, etc) is priced on the near-term. Climate models talk about doom decades/centuries down the road.

      Basically, the doom mongers wondering why insurers aren’t alarmed about what the climate models are saying is like wondering why the marathon runner isn’t trying to collect his gold medal before he’s even passed the *starting* line.

  7. “With increased damage to houses through catastrophic fires, floods and other disasters…” –
    [all of which could have been avoided through proper forest management, as well as caring about where we choose to build], “the global insurance market is under increased pressure to” [raise rates accordingly, charging more for those who choose to live in areas more prone to such disasters].
    There, fixed.

  8. Climate Change Disaster is, as the experts say, a problem it is a slow-moving Disaster. Year-to-year changes, even in the worst-case, much less the best-case, are so small as to be lost in the noise of weather.

    In a century with the expert-predicted (worst-case) 1 degree C increase would change your weather to that of a location 2 degrees of latitude closer to the equator today. (https://sciencing.com/convert-degrees-latitude-miles-5744407.html)

    For a US citizen this means that to experience the climate predicted by the experts in one century move 140 miles south.

  9. We also have more stuff. And more more expensive stuff.

    If my dad’s basement flooded, he’d lose some third-hand furniture, a few very old black and white TVs, some tools.

    If my basement flooded, I”d lose a wide-screen TV, surround sound system, computer, probably a tablet (or two), some newish furniture…etc.

    So its not even inflation, per se, its replacing things that didn’t exist 60 years ago…let along 6.

    • Its about replacing Leo DiCaprio’s $15mil home in the hollywood hills, instead of the $200k shack he would have lived in if he actually believed even a fraction of what he says.

  10. Looks like Antony Funnell forgot that the Obamas bought a house on the seashore. That would be a Reality Check, writ large. Never mind!

    • I’m wondering about the sanity of these people. They had to realize the criticism it would bring.

      Why did Gates purchase a $43 million “dump” on the beach in Del Mar? Money is no object, so why?

  11. This just proves that climate ‘modelers’ know nothing about the tools that they use. Insurance actuaries make some silly assumptions (especially at Geico), but they are well rooted enough to understand risk in near and long term. The first insurance company to keetow to their demand will be the next one to go bankrupt because no one will pay their high premiums on uncertain results.

  12. Monetary inflation is a far bigger factor for insurance company’s consideration than climate change. The CC “weather change” of any given city supposedly becoming similar to a city 200 miles further South, is irrelevant compared to the inflationary cost of damages from storms, floods, fires, causing twice as many dollars of damage due to repair cost increases of labor and materials. Not that they won’t mention CC as an excuse for a rate increase…..

  13. The revelation which Mr Buffett drives home and one that eludes most Climate Bedwetters is that the year 2080 or 2100 is not the next year immediately after 2020. We get to 2080 or 2100 one year at a time.
    It’s annual process that ensures none of us will be around then. And our descendants will be better off for that.

  14. That’s a telling (and wonderful) excerpt from Buffett’s Annual Letter to Shareholders of Berkshire Hathaway Corporation. It’s great for a variety of reasons, not least of which is that one of Buffett’s considerable talents is an unusual ability to write clearly and explain complex subjects.

    WEB is (and has always been) a logic engine. His ratiocination on the topic bears consideration by anyone who claims to be a serious student of the topic.

    Kudos to Eric Worrall for bringing the quotation to the fore. I’m a Berkshire shareholder and even I had forgotten it (though I have absolutely not forgotten WEB’s unequivocal declaration that Berkshire has seen no evidence of any rise in insurance claims that can be attributed to “climate change”/CAGW.

  15. Last I looked, Buffett had some insurance concerns, but they have nothing to do with “climate change”. They have to do with the reduced value of insurance company zero-interest money in a low interest rate environment. That is to say, that your insurance premium constitutes a zero-interest loan to the insurance company who can invest it and earn interest until it is needed to pay out a claim. But interest rates have been dropping dramatically of late, so maybe insurance is not as great a business as it was in times of yore.

    Why a sensible businessman would take a bunch of self proclaimed experts who have (AFAICS) never, ever, made an accurate prediction seriously is a different question.

    • All businesses “profit” when money coming in is less than money going out.
      For insurance companies, money coming in includes premiums and investment income. If investment income falls, then premiums will have to rise.

  16. Call this Noah’s Law: If an ark may be essential for survival, begin building it today, no matter how cloudless the skies appear.
    Good principle, Mr. Buffet, but bad example. Noah wasn’t dealing with risk; he had Insider information….
    : > )

    • I wonder how big an ark Mr. Buffet has built?
      After all he’s telling the rest of us that no matter how small the risk, we must spend whatever it takes to protect ourselves from every possible problem.

      • “I wonder how big an ark Mr. Buffet has built?”

        Well, I imagine the tax credit he got for the $32 billion he gave Gates would make for either a very, very large ark, or a whole fleet of them…

  17. In my believe, the risk management by insurances is much more sophisicated as that climate “scientists” are producing, because they built on much more and longer experiences 😀

    • Insurance models are validated every year.
      If they over estimate risk, then they charge to much for their policies and lose customers to those customers who don’t.
      If they under estimate risk, then they charge to little and lose money.

      In order to stay in business they have to correctly estimate risk, every year.

      • “In order to stay in business they have to correctly estimate risk, every year.”

        Or, if all else fails, get the government to force people to buy insurance.

        It would also help if the government could also pay for stuff that breaks before the insurance industry has to pay out.

  18. The problem with Buffet’s examples is that he assumes that there is no cost to “doing something”.
    Does it make sense to spend more preventing a disaster than that disaster is likely to cost?

  19. Climate change hysterics explain to me all the time “my house is under sea level!” (it is 12 feet above) and I am risking my life to live here because I can drown at any moment. Meanwhile my insurers have decided I do not need flood insurance because my area is not a flood zone, although i am welcome to pay out the nose for extra flood insurance should I so desire. We haven’t had even 2 inches of water in the yard in the 5 years since we bought the house. I haven’t bothered.

    • You gotten a little bad information from somewhere. To be correct, it is the determination of what the hazard zone is that affects your need/price of flood insurance. And the requirement to have it is from your mortgage company. Otherwise it is always optional and if your property is not in a special hazard zone flood insurance is very inexpensive.

  20. Eric, you Aussies should be barracking for the insurance companies to factor climate change into your premiums.

    Since Australia was documented as “a land of droughts and flooding rains” over a century ago, a changing climate is probably all upside for the joint.

    So start demanding annual reductions in your insurance premiums NOW!

  21. Personally, at least here in Canada, i think the insurance industry works with government to keep money moving through the economy.
    Example; I garden here in calgary, i grow lots of things. In 2011 there was a hail storm, it was really nothing, i did not even lose my garden. Big sunflowers, no holes through leaves even
    My neighbors houses on either side, 20′ away, needed new siding and shingles.
    Hmm

    A few years later, another hail storm, worse, but still didn’t damage my garden.
    I called an adjuster who inspected roof, said small damage only, no claim.
    Called a different adjuster, he said 80% damage, need new roof, got new roof.
    hmm

    It is my belief Canadian insurers are on board and inflating the climate crisis BS to allow higher rates

    • “It is my belief Canadian insurers are on board and inflating the climate crisis BS to allow higher rates”

      Yep, point I made in the thread elsewhere.

      See: auto insurance. In every instance when the government gets involved, rates go up, what it pays for goes down. Every time.

      Follow the money: government forces you to pay for something, you give money to a company, it takes some of that money to “lobby” the government…repeat until profitable.

  22. You need the power of an authoritarian government to ignore competitive insurance rates and go with the advocacy models and policy agenda. That has not happened yet. Maybe we need a tax on Canadian snowbirds to Florida beachfront properties instead. But then they would just divert to Cuba in supporting dictatorships there.

  23. Expected Loss = Probability of Loss x Severity of Loss.
    In many cases the probability of loss zero, based on experience. (French Nucler Power Plants for example).
    In this case you can take a multiple of Chernobyl or Fukashima.
    How do you insure a $2 million Bugatti ? Syndication. !0 insurance companies charge the premium
    for a $200,000 Porshe 911 Turbo.
    In most cases, such as catastrophic climate change, it makes sense to self insure. Since the government has b zero cost of borrowing, the government can insure and socialize the cost in the unlikely event of catastrophic climate change.

    • You mean the gubmint can print money like they are doing now for COVID?

      Beef here just went up 20% on the wholesale market according to my butcher. That is how we will pay.

  24. I lost the focus after reading ‘an academic’. Having worked in academia myself I have always been accutely aware of something Mark Twain, or was it Oscar Wilde, said. That some ideas are so idiotic that you need to be an academic to take them seriously. The idea that academia knows better than the insurance industry is in that category.

    • “Academia has a tendency, when unchecked (from lack of skin in the game), to evolve into a ritualistic self-referential publishing game.”

      “Avoid taking advice from someone who gives advice for a living, unless there is a penalty for their advice.” –

      “Given their track record, I would recommend hiring academic economists and do the OPPOSITE of what they advise. For they aren’t even random.”

      “You need to realize that the only thing a career academic can really teach you is how to be a career academic.”

      “We didn’t break the mafia by reasoning w/its members. Remember: you’ll never break special intrsts, lobbies, journalistic monoculturists & academic rent seekers by convincing them, but by exposing them, working on their customers. Accountability, put Skin in their game.”

      Nassim Nicholas Taleb in Skin in the Game

  25. I do like the thought that the jobs of insurance people depend on getting it right.

  26. Believe what we tell you, not your own lying eyes…

    What they tell you comes from climate models that they created, which are way different than your eyes will tell you if you look at measured trends.

  27. “the dire predictions of most “experts” about Y2K”

    What about those predictions and those “experts”?

    They said that bugs needed to be fixed, and they were fixed, at great cost, and (almost) nothing happened because (almost) no bugs were left in important financial software?

    • Either you are too young to remember or you’ve simply forgotten the overblown hysteria and doomsday talk from back then. The fact is while those of us involved with computers at the time knew that the disasters predicted were well overblown even if none of the software had been updated in time, there were lots of people that didn’t understand much of anything about how computers worked, and thus you had main stream sources (the now aptly dubbed “fake news media”) going on and on about the danger with “scary scenarios”. But the truth is Elevators weren’t going to stop, heat wasn’t going to vanish, airplanes and trains weren’t going to come to a halt, etc. Even getting Lenord Nimoy to rattle off the list of “dangers” didn’t make them a realistic possibility, but that didn’t stop the scaremongers.

  28. “You might think business stars like Warren Buffett have some idea of how to run an insurance company. But climate experts keep trying to explain that the focus insurers have on observational evidence is leading to insurers underestimating the risk of climate disasters.”

    Translation
    You might think business stars like Warren Buffett have some idea of how to run an insurance company. But climate experts keep trying to explain that you can’t just look at forecasts from the data to estimate risk because then you miss out on imagined “COULD” risk. Plate tectonics, for example. It COULD! even more than climate COULD.
    https://tambonthongchai.com/2018/12/07/ete/

  29. Buffett’s whole answer boils down to “the answer to climate change is adaptation”. Simple and unavoidable logic.

  30. Insurers love catastrophic events. Best free advertising on the planet. They take a loss that year for sure but rates usually double and everyone, especially those who were uninsured, pays up.
    Hurricanes are very very profitable.

  31. “Put bluntly, insurers still spend most of their time looking in the rear-view mirror.”

    Put even more bluntly, alarmists rear-view mirror is convex and shrinks the past, making every new turn in the journey appear unprecedented. Much like driving inebriated.

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