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

By Eric Worrall – Re-Blogged From WUWT

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.

CONTINUE READING –>

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