Climate Change

Government Misses Boat, Insurers Build Boat

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The GAO reports that private insurers are accounting for global warming in their financial models. Naturally, the government fiddles while Miami floods:

Although the relative contribution of event intensity versus societal factors in explaining the rising losses associated with weather-related events is still under investigation, both major private and federal insurers are exposed to increases in the frequency or severity of weather-related events associated with climate change. Nonetheless, major private and federal insurers are responding to this prospect differently. Many large private insurers are incorporating some elements of near-term climate change into their risk management practices. Furthermore, some of the world's largest insurers have also taken a long-term strategic approach toward changes in climate. On the other hand, for a variety of reasons, the federal insurance programs have done little to develop the kind of information needed to understand the programs' long-term exposure to climate change

Pro-market global warming skeptics should take note–businesses have started putting money on possible impacts from warming. But the "no regulation" crowd is onto something, too. Rather than forcing millions of people to cut back on consumption of fossil fuels, etc., let 'em buy a little more insurance from companies that have already built warming into their models. The Day After Tomorrow notwithstanding, we'll have a decent shot at handling the economic side-effects of global warming with relative efficiency (here in the U.S. anyway).

Via Marginal Revolution

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  1. I’m sitting here rolling my eyes at this again…

    Storm intensity is related to relative differences in temperature and since global warming would warm up the poles more than the tropics, it would therefore decrease storm intensity overall albeit likely change storm location.

    I guess at least its not regulation that’s doing this, but I still get to pay more because of the panic factor.

  2. increases in the frequency or severity of weather-related events associated with climate change

    Meanwhile, a brand-spanking new weather model turns the increased-hurricane-severity-due-to-global-warming scenario on its ear. Turns out that “global” warming increases upper level wind shear, which is the natural enemy of hurricane development and severity. This is well and good if you believe computer models, as Chicken Little doomsdayers tend to do. So I’ll be looking forward to a decrease in insurance rates for coastal dwellers just as soon as this new weather model becomes politically correct.

  3. “Pro-market global warming skeptics should take note–businesses have started putting money on possible impacts from warming”

    The market can only act on the information that it has. If the information is flawed the market will be flawed. Yes the market is reacting to what the science thinks to be the case today. But to point to the market’s reaction as evidence of that science’s validity is just begging the question. Indeed, it is perfectly rational for the market to take into account of the science even if it is skeptical of the science. The market just discounts the risk by whatever percent chance it thinks that there is of the science itself being flawed.

  4. Wow, good thing you can refute hundreds of thousands of man hours of work by phd actuaries and cat modeling geologists with a one-sentence inference. Marsh or AON would pay you a mint, why are you wasting time here?
    Don’t take my word for it though, I’m just a property underwriter for AIG

  5. A little skepticism is in order here. Of course the insurance companies would like us to believe they “take everything into account”, but let’s get real – global warming, based on current best understanding, is close to a non-issue from a risk point of view.

  6. Jack,

    The actuaries are only as good as the numbers and assumptions that go into them.

  7. Let’s see if I understand the chain of events here…

    1. Coastal disasters pummel insurance companies.
    2. Insurance companies try to raise rates to compensate.
    3. States restrict insurance companies’ raising rates as much as they want.
    4. Someone notes that global warming may increase storm intensity.
    5. Insurance companies build global warming into models, resulting in higher rates.

    We of course await…

    6. States, alarmed by global warming, allow insurance companies to raise rates.

    Have I got it all correct?

  8. Miami is a rotten test case for global warming.

    If New Orleans is any guide, when Miami has its flood / storm disaster the real reasons will involve overdevelopment of coastal properties, shoddy building, indifference to traffic congestion, and the subsiding of ground level to below sea level.

    The weather’s always been there; but when there were fewer people in Florida and most of them dirt poor, the weather did less economic damage (probably less human damage, too, as the oldtimers knew better than to spend late summer on the coast). Rather than climate change, insurers (and the rest of us) should be looking into weather susceptibility.

  9. One other thing Jack. Those PHD actuarial geniuses have never gotten anything wrong in the past have they? I guess that is why the insurance industry never losses money after a disaster that deviates from the historic norm.

  10. David Ross,

    You are exactly right. Some day there will be a major hurricane hit Long Island and it will make Katrina and Andrew look minor league by comparison. Inevitably, people will trot out the figures of death and destruction as evidence of global warming or cooling or world sin or whatever never bothering to notice any of the factors you mention.

  11. Long term weather prediction is iffy at best – even with decent models. They do OK, but there are always new concepts that we don’t think of to put into weather models and we trim down other things because of the massive computing power that it takes. That’s why for a long time, the CRAY supercomputers have been used for global weather models.

    Even as complex as models are becoming, we learn that the atmosphere is even more and more complex and we don’t understand it yet. Trust me – I’m a student doing a project on the Valparaiso University Purdue Regional Model right now and as amazing it is how much we can do, its also amazing what we can’t do.

    Oh, and by the way, hurricanes is one thing that we CAN’T do. Hurricanes DO NOT develop on current weather models. Once they develop, models can predict their movement for about 2-3 days in advance, but that’s all.

  12. The gullibility of global warming “skeptics” never ceases to amaze me.

    Ooh, look, I found a single preliminary report in a non-refereed journal, so global warming is all bunk!

    I’ve yet to meet the “skeptic” who didn’t grasp desperately at even the weakest evidence that contradicted the existing science about global warming.

  13. John,

    You don’t understand actuary tables, do you?

    Hint: what happens on one day doesn’t demonstrate that they’re wrong.

    Foxhunter,

    Climate predictions and weather forecasting are two different topics. I will bet you $1000 I can predict how many home runs David Ortiz will hit this season, give or take half a dozen either way, but I won’t bet a cent on how many he will hit on July 23.

  14. If global warming isn’t real, then is this a market failure?

    And if the market can’t fail, does this mean that global warming is happening?

    (Note to Timothy: I’m well aware that “market failure” has a specific technical meaning that doesn’t apply here. I’m just having fun.)

  15. Isn’t it natural to be skeptical?

    Or is it more natural to swallow whole what you are given?

  16. Oh, yeah, Mangu-Ward’s stupid column.

    Can anyone think of a reason why an executive branch agency in 2007 wouldn’t take responsible steps to address the threat of global warming, the way the private corporations are?

    Come on, let’s all put our heads together, and see if we can come up with an explaination.

  17. Shorter climate-change skeptics: “The market is always right, except when it disagrees with me, in which case it’s operating on bad data.”

  18. “John,

    You don’t understand actuary tables, do you?

    Hint: what happens on one day doesn’t demonstrate that they’re wrong.”

    I perfectly understand them. But they are not science. They are only as good as the information and assumptions that go into them. I could make an actuary table based on the high probably of glacers once again covering North America. That acturary would be mathmetically at least just as valid as any other table. Of course in reality it would be usless because the assumptions that went into it were untrue. The existance of some actuarial tables taking into account global warming says nothing about the validity of the made made global warming.

  19. “Isn’t it natural to be skeptical?”

    It’s natural to only think short-term, and to ignore anything that you would find inconvenient.

  20. Of course the market can fail thoreau. It fails all of the time. Where do you think asset bubbles and recessions come from. I don’t think anyone who knows anything about economics would argue that markets can never fail. Ussually the failure is the result of imperfect information.

  21. joe,

    You can take a stab at how many hrs David Ortiz will hit, but what if he got injured or lost his power. What if he lost his passion for the game? What if he jacked himself up on steroids a la Palmeiro? What if he is just seeing the ball super well this season?

    Give me an exact number of hrs he will hit this season, and I’ll give you $1000 if you are right, just like you said. If he doesn’t, you give me $1000. Or, hell, I’ll take $10 even.

    The point is there is soooo much variablitiy that we can’t predict. You can guess based on some averages and effects you know about, but it would be a miracle if you were right.

    And those small changes in something as huge as global climate make waaaay more of a difference over 100 years or even 1 year.

  22. Joe, don’t be silly. Baby Jesus told our President that we need not worry about globular worming.

  23. The gullibility of global warming “skeptics” never ceases to amaze me.

    joe, you’re the gullible one here. You goose-step to whatever fad matches your philosophy. By the way, the conversation at present is about weather severity and insurance rates, not whether global warming actually exists.

  24. But I thought the market will solve the problem. So what happens when the market tries to solve a non-existent problem?

  25. “Ussually the failure is the result of imperfect information.”

    Seems to me the failure is usually due to self-delusion and crazy speculation, not the application of conservative defensive strategies.

    The ‘imperfect information’ is often self-inflicted due to denial of unwelcome data. That appears to describe the behavior of the climate change skeptics, more than it does the insurance companies.

  26. Question:

    Could this change in insurance policies be a result of a perceived risk of the damage done by global warming as opposed to an actual risk?

  27. John,

    If you understood how actuarial analysis is done, or even the rudimentary concepts behind it, you would not have written “Those PHD actuarial geniuses have never gotten anything wrong in the past have they? I guess that is why the insurance industry never losses money after a disaster that deviates from the historic norm.”

  28. “So what happens when the market tries to solve a non-existent problem?”

    The geniuses in marketing will come up with a campaign pointing out how that problem’s been licked!

  29. thoreau writes: “But I thought the market will solve the problem”

    If you’d read the Wall Street Journal editorial page, you’d know there are no problems to solve.

  30. Look at it this way Joe, we could debate about how many home runs Ortiz will hit. I do the math based on his prior performance but assume that he has a degenerative condition in his knee that will begin effecting his performance in mid-July and only get worse from there and adjust my calculations accordingly based on the effect that condition has had on other players. You do the same math but assume that he doesn’t have the knee problem and is healthy all year. Both of our actuarial tables are equally valid. The question is who is right and who is wrong about Ortiz’s knee? The tables themselves tell us nothing about the validity of the medical information that went into them.

  31. “Could this change in insurance policies be a result of a perceived risk of the damage done by global warming as opposed to an actual risk?”

    YES!

  32. Foxhunter,

    “You can take a stab at how many hrs David Ortiz will hit, but what if he got injured or lost his power. What if he lost his passion for the game? What if he jacked himself up on steroids a la Palmeiro? What if he is just seeing the ball super well this season?”

    Yes, when you’re dealing with a single variable like that, oddities like that can strongly influence the outcome. But when we’re talking about the atmosphere, the “law of big numbers” applies.

    “The point is there is soooo much variablitiy that we can’t predict.” We can’t predict a single event’s outcome with confidence, no. But once again, when we’re talking about a data set as large as the atmosphere, the oddities are going to cancel each other out.

  33. It’s like this Jon H:

    There is no problem. And even if there was, well, the market will solve it. Because it’s a small problem and the market is perfect. But it may be that the problem is so big that it’s impossible to solve, so there’s no reason to do anything about it. So we should do nothing and let the market solve the problem that doesn’t exist because it’s too big to solve.

  34. Oh, and watch out for some global warming enchanced tornadoes in eastern Oklahoma today. Insurance rates are about to go up there…

  35. “joe, you’re the gullible one here. You goose-step to whatever fad matches your philosophy.”

    Whatever you say, ed. How’s the search for the WMDs going?

    John,

    I understand your point about assumptions. That wasn’t what I was criticising.

  36. If you understood how actuarial analysis is done, or even the rudimentary concepts behind it, you would not have written “Those PHD actuarial geniuses have never gotten anything wrong in the past have they? I guess that is why the insurance industry never losses money after a disaster that deviates from the historic norm.”

    I didn’t make my point well enough. My point was a lot of times the “historic norms” are wrong and insurance companies loose money because they don’t have the right historic information, what really is a 100 year flood things like that, and base their rates on erroneous information. In a perfect world with perfect information, insurance companies should only loose money in the short run and never in the long run. Of course they don’t have perfect information.

  37. “Oh, and watch out for some global warming enchanced tornadoes in eastern Oklahoma today. Insurance rates are about to go up there…”

    They’re probably less concerned about that, than about increased occurrence of tornados in places where they have been rare. The current insurance rates would need adjustment if Tornado Alley grows or shifts.

  38. “…when we’re talking about a data set as large as the atmosphere, the oddities are going to cancel each other out.”

    Either that or amplify themselves.

  39. But I thought the market will solve the problem. So what happens when the market tries to solve a non-existent problem?

    The market also includes insurance companies who will garner business because they don’t include global warming in their pricing. And the market includes insurance consumers who purchase less insurance because they don’t believe in global warming and/or can’t afford to insure against it at the new rates.

    No market failure. But you knew that already.

  40. All of this says is that “insurance companies believe that there is a good possibility that the climate will warm and that will affect their risks”. So what? Maybe the insurance companies are wrong? Further, even if they are right, there is nothing to say that such warming isn’t the result of non man made factors. From the insurance companies’ perspective, it doesn’t matter if the warming occurs from CO2 or moonbeams from Mars, their risk goes up accordingly. So, people who point at the fact that insurance companies are planning for global warming as evidence of said global warming are pointing at pretty weak evidence.

  41. “The tables themselves tell us nothing about the validity of the medical information that went into them.”

    But if you were real actuaries, and there was $500 million or more riding on your prediction, don’t you think you’d confirm the medical information before making a prediction? If ten doctors say, no problem, and one says otherwise, would you base your 1/2 Billion dollar decision on the skeptic doctor?

    These are people with a lot of money riding on correctly assessing risk. You seem to be assuming that they are wrong, when the industry would be out of business if they were wrong more than they were right.

    The biggest reason insurance companies lose money is low interest rates.

  42. “But if you were real actuaries, and there was $500 million or more riding on your prediction, don’t you think you’d confirm the medical information before making a prediction? If ten doctors say, no problem, and one says otherwise, would you base your 1/2 Billion dollar decision on the skeptic doctor?”

    I don’t know. I don’t worship at the alter of insurance companies. They are acting on what they consider the best science available. Is the science right? Well that is the whole question isn’t it? That is why pointing to the insurance companies is just question begging.

  43. “The market also includes insurance companies who will garner business because they don’t include global warming in their pricing. And the market includes insurance consumers who purchase less insurance because they don’t believe in global warming and/or can’t afford to insure against it at the new rates.”

    You could also say ‘The market also includes mortgage lenders who will garner business because they sell NINJA loans to vagrants who want to buy McMansions. And the market includes mortgage customers who take on such loans because they don’t believe the market will ever drop, and/or can’t afford to buy $700,000 homes using conservative mortgages.’

  44. Jon H,

    I know, I was just kidding about that (well, not the part about tornadoes today). Although on further analysis, eastern Texas looks more favorable.

  45. John,

    I gotcha now. I thought you were arguing something else.

  46. I freely admit that I have nothing to contribute here. I’m just having fun watching as the market (which is never wrong) responds to the problem of global warming (which doesn’t exist).

    Two articles of faith enter! One article of faith leave!

  47. John writes: “I don’t know. I don’t worship at the alter of insurance companies. They are acting on what they consider the best science available. Is the science right? Well that is the whole question isn’t it? That is why pointing to the insurance companies is just question begging.”

    By comparison, the corporate climate change skeptics don’t especially care about whether the science is right, because the only risk they’re trying to manage is the risk of regulatory action damaging their profits.

  48. John,
    Insurance is one of the most successful industries in the US (there’s a reason why insurance companies and banks dominate a city’s skyline). Insurance companies that go out of business take on more potential risk than they have the capital to cover. So the one time catastrophe kills them.

    Going broke while being right happens in other parts of the financial services industry as well. LTCM bet on the right horse. Problem is, they ran out of capital and their margin calls killed them. The owners of their positions after liquidation made a killing.

  49. “Two articles of faith enter! One article of faith leave!”

    ‘No! He’s got the mind of a child!’

  50. Oh, snap!

    (Do you kids still say “Oh, snap?”)

  51. I’ll attempt to derail this thread (because global warming discussions bore me) by asking the Reason staff: No love for the late David Halberstam? The Best and the Brightest is one of the best books of the 20th century. And The Powers That Be is right up there.

  52. Thoreau,

    For the second time, who ever claimed that the market is never wrong? No one with any knowledge of economics that is for sure.

    JonH

    Look at it this way, if the insurance companies were ignoring global warming in their actuaries and someone got on here and said, “of course the science is bogus, look at the insurance companies they aren’t buying it”, that would be a pretty lame argument. The obvious answer is “maybe the insurance companies are wrong.” If that response works one way it works the other.

  53. Is anyone out there still drawing a distinction between global warming, which nearly everyone agrees is happening, and man-made global warming?

    The actuaries don’t care what is causing the warming trend, only that it is happening. Citing changes in what insurance companies do as some kind of support for the claim that anthro CO2 is driving climate is a non sequitur.

    Insurance companies that go out of business take on more potential risk than they have the capital to cover.

    Lets not overlook the sales side of this. Companies go out of business because they haven’t collected enough premiums (that is, convinced enough people that they should buy insurance because of what a big bad scary world it is) to cover the losses that do happen.

    Insurance companies are bureaucracies (which are naturally risk averse and thus tend to exaggerate risk) and sales organizations (whose sales are driven by increasing the perception of risk by their customers). They are not exactly unbiased and disinterested arbiters.

  54. John | April 24, 2007, 4:00pm | #

    All of this says is that “insurance companies believe that there is a good possibility that the climate will warm and that will affect their risks”. So what? Maybe the insurance companies are wrong? Further, even if they are right, there is nothing to say that such warming isn’t the result of non man made factors. From the insurance companies’ perspective, it doesn’t matter if the warming occurs from CO2 or moonbeams from Mars, their risk goes up accordingly. So, people who point at the fact that insurance companies are planning for global warming as evidence of said global warming are pointing at pretty weak evidence.”

    Yes RC I made that point above.

  55. Two articles of faith enter! One article of faith leave!

    Yes, in the end there can only be one. But sometimes the quickening does weird things. What if one of said articles of faiths is accidentally revived, yielding a really bad sequel?

    Anyway, aim for the head, That’s all I’m saying.

    Or sweep the legs.

  56. (probably less human damage, too, as the oldtimers knew better than to spend late summer on the coast).

    The Florida hurricane in 1926 killed over 2000 people and nearly wiped a couple of good sized South Florida towns of the map.

    The Labor Day hurricane of 1935 killed over 400 in the Florida Keys alone. Nobody knows how many died in the Carribean before it got there.

    Six thousand died in 1906 when a storm hit Galveston. The City Fathers embarked on a plan to raise the island eighteen feet to avoid a reoccurence.

    Human loss has tended to go down as forecasting and preparedness have improved. However property losses have increased dramatically and the primary reason has been coastal development.

    And a lot of that coastal development has been either directly subsidised or incentivised by Federally subsidised flood insurance and insurance premiums kept artificially low by populist legislation.

  57. Can anyone think of a reason why an executive branch agency in 2007 wouldn’t take responsible steps to address the threat of global warming, the way the private corporations are?

    Joe, Joe, Joe. You’re trying to use “responsible” and “government” in the same sentence again.

    My point was a lot of times the “historic norms” are wrong and insurance companies loose money because they don’t have the right historic information, what really is a 100 year flood things like that, and base their rates on erroneous information.

    Actually, the “historic norms” are “correct.” It’s not a problem of bad data. They are also usually the best predictors of the future. But things do change over time. Then the historic norms are still correct, they’re just no longer applicable.

    For instance, the actuarial tables predicting AIDS deaths using data from the 70s and 80s are still accurate as far as the historical data goes. But that historical data no longer applies due to the introduction of the AIDS drug cocktails that are keeping so many HIV positive folks relatively healthy. People using the actuarial data cashed out insurance policies to have money to live on during their last years. Now they have a lot more “last years” than they counted on.

    By comparison, the corporate climate change skeptics don’t especially care about whether the science is right, because the only risk they’re trying to manage is the risk of regulatory action damaging their profits.

    By comparison, the corporate climate change believers don’t especially care about whether the science is right, because the only risk they’re trying to manage is the risk of regulatory action damaging other peoples’ profits.

  58. I think that John Lott has done some interesting statistical analysis regarding this topic.

  59. On Halberstam, can I vote for “The Making of a Quagmire”? He laid out the problems of American policy in Vietnam in 1964. 1964! Nobody listened, but I’ve never read anything that contradicted his conclusions.

  60. The market can only act on the information that it has. If the information is flawed the market will be flawed.

    You are right, of course. But, you seem to assume that “the market” passively accepts information that all comes from some source outside “the market”. If you’re a smart businessman or investor, one of your biggest activities is digging up information.

  61. Yes, in the end there can only be one. But sometimes the quickening does weird things. What if one of said articles of faiths is accidentally revived, yielding a really bad sequel?

    I’m really glad this didn’t happen with The Highlander. I have no doubt that Connery wouldn’t be willing to work on any sequel, as it would just be ridiculous for his character to return.

  62. I have no doubt that Connery wouldn’t be willing to work on any sequel, as it would just be ridiculous for his character to return.

    Ha ha ha ha. Patience, Highlander. You have done well. But it’ll take time. You are generations being born and dying. You are at one with all living things. Each man’s thoughts and dreams are yours to know. You have power beyond imagination. Use it well, my friend. Don’t lose your head.

  63. I will gladly wager anyone on this forum $1000 that I can forecast how many home runs David Ortiz will hit on July 23rd, give or take half a dozen.

  64. “The gullibility of global warming “skeptics” never ceases to amaze me.
    Ooh, look, I found a single preliminary report in a non-refereed journal, so global warming is all bunk!”

    Joe doesn’t need to read the article since, you know, it might challenge his well intrenched world view. The money quote …

    “This study does not, in any way, undermine the widespread consensus in the scientific community about the reality of global warming,” said Soden. “In fact, the wind shear changes are driven by global warming.”

    Jesus joe, you really are a f*cking troll.

  65. pigwiggle,

    I didn’t criticize the article. I criticized the argument that attended the link to the article: “Meanwhile, a brand-spanking new weather model turns the increased-hurricane-severity-due-to-global-warming scenario on its ear…This is well and good if you believe computer models, as Chicken Little doomsdayers tend to do.”

    Learn to read, dipshit.

  66. We of course await…
    6. States, alarmed by global warming, allow insurance companies to raise rates.
    Have I got it all correct?

    Probably so; and/or the insurance companies don’t think people will be able to stop global warming (assuming it happens and that it’s more bad than good, etc., etc.)

    I’m going to celebrate by using two sheets of T.P. and flushing thrice.

  67. “I didn’t criticize the article. I criticized the argument …”

    Mkay, so “…a single preliminary report in a non-refereed journal..”, wasn’t a criticism of the article, as such. I see – It’s just that the best criticism of ‘the argument’ (in joe speak, “global warming is all bunk”) wasn’t to just quote the very article wherein they verify global warming. Red handed joe. Just sack up, you didn’t read the article.

  68. I just want to say that this is comment #69 in this thread.

    That’s all.

  69. Actually, the really grave indicator will be when global warming insurance becomes either unaffordable or unavailable. After all, terrorism insurance didn’t get looked at that closely until after 9/11, when the insurance companies looked at their potential exposure and decided to mostly get out of the business.

    I suspect the same thing will happen over the course of the century, as insurers realize they can’t pool risk on something which is causing problems on a global scale.

  70. There’s nothing wrong with writing “a single preliminary report in a non-refereed journal,” pigwiggle.

    There’s a problem with seizing on such a thing as conclusive proof of something.

    “Just sack up, you didn’t read the article.” No, I didn’t. That’s why I didn’t offer an opinion on it, just on the way ed used it.

    Is that really such a difficult concept?

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