As an insurance guy who has been on both sides of the climate change debate (I’ve worked for organizations full of climate change skeptics and now head one that believes it’s an important public policy issue) I’ve heard just about every claim about what “insurers say” about climate change.
Plenty of people who want to minimize the risks (or even existence) of human-caused climate change will say that insurers are trying to line their pockets by fomenting fear of natural disasters. Plenty of environmentalists, on the other hand, will make broad statements about the insurance industry’s deep concern about the issue as a way of demonstrating that at least one big business supports their preferred policy solutions.
As with many other issues, the truth lies between the extremes. A balanced look at the insurance industry’s perspective on climate change reveals a lot of nuance.
On one hand, if one doubts the opinion of an overwhelming majority of scientists, the insurance industry provides another major data point. Given that accurate and unbiased weather forecasts are key to property insurers’ business, the fact that the industry broadly accepts that climate change is real and likely to be a problem should be taken seriously by anyone who believes in the power of markets to aggregate information. If insurers were not concerned about climate change, that would be a very strong piece of evidence that politicians, the media or scientists have hyped the issue beyond what it deserves.
In fact, every large property insurer incorporates climate change-related projections into its own models. Every large property insurer that I know of considers the likelihood of climate change-linked catastrophes to be a future operational threat. Smaller property insurers do less long-term planning and are less likely to make direct use of climate change projections, but they still feel the impact of those projections in terms of how much reinsurance they can buy and at what price.
On the other hand, the business implications of climate change to insurers are a lot smaller than many environmentalists assume. I’ve attended dozens of insurance industry conferences—even some focused on environmental issues, with environmental groups in heavy attendance—and climate change is fairly low on the list of insurers’ own pressing concerns.
The first thing to understand is that property insurance is just one segment of the overall insurance industry. The property/casualty industry, with $426.2 billion of premiums in 2010, is a fair amount smaller than the life/health insurance industry, which had $581.2 billion. And the property/casualty industry is made up of dozens of lines of business, many of which just simply aren’t terribly concerned with the weather. That includes the largest single line of business – private auto insurance, representing 37.6 percent of property/casualty premiums – as well as other major lines like liability, workers’ compensation, commercial auto and medical malpractice.
With $61.3 billion of premiums, homeowners insurance is the biggest line of business that can expect to see a direct impact from climate change. But it is also one of the least profitable lines of business. Indeed, no company of any size sells only homeowners insurance. While sea level rise and more frequent natural disasters would impact other lines of business – including business insurance, fire, crop insurance, and ocean marine – most insurance contracts are written on an annual basis. Insurers are much more interested in what calamities are likely to befall their policyholders this year, and to price those risks accordingly, than they are in what might happen 20 or 30 years down the line.
In a nutshell, while climate change offers a potential long-term threat to insurers, regulatory hurdles, pricing challenges, investment returns, and ordinary claims are omnipresent and impact earnings every quarter. Over the past decade, insurers fled the Florida market in droves because of poorly designed government regulations and continued subsidies for development in hurricane-prone areas. At the same time, Louisiana and Mississippi – which both pursued more free-market regulatory courses— actually have more companies writing insurance in coastal areas than they did before Hurricane Katrina. No insurer that I know of has ever exited (or entered) a market because of climate change.
Finally, I don’t know of a single insurer that really has a strong corporate-wide position on what public policies would be the most appropriate to deal with climate change. Some, particularly large European companies, have supported various sorts of energy taxes intended to reduce carbon pollution. But ultimately, the industry’s relative silence isn’t that surprising. When it comes to complex issues without an identifiable direct and immediate business impact, few companies of any sector are likely to go too far out on the limb.
The bottom line is pretty simple: the insurance industry’s positions on climate change do help validate that it is real and a problem. But when it comes to a broader set of claims that environmental groups tend to make, the insurance industry as a whole doesn’t really have that much to say.