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Saturday, May 17, 2014

New Yorker: Insuring the Apocalypse

by McKenzie Funk, The New Yorker, May 15, 2014

Last week, the White House released the National Climate Assessment, and the news is grim. Coral reefs are dying, shellfish will increasingly make us sick, and cherries are being decimated by weather extremes. Along the Eastern Seaboard, waters will rise up to 4 feet—perhaps 6 feet—by the end of the century, making Sandy-like storm surges a frequent event. California will continue to burn. Arizona will continue to burn. For most businesspeople, climate change seems bad for the bottom line.

But if you, like Berkshire Hathaway C.E.O. Warren Buffett, work in the disaster business, reports like the National Climate Assessment, all 829 pages of it, are free advertising. In a recent television appearance, Buffett suggested that global warming—at least the idea of it—has been good for the insurance industry. “I love apocalyptic predictions on it because, you’re right, it probably does affect rates,” he told an interviewer. “The truth is that writing U.S. hurricane insurance has been very profitable in the last five or six years.”

Buffett’s insurance companies have yet to adjust how they calculate their exposure to hurricane risk, he explained, though “that may change in ten years.” They haven’t been hoarding more cash to prepare for bigger storms; they haven’t been cancelling policies. His point was not that climate science is a sham but that what it has mostly done—for now, for him—is to prop up revenues and bring in new customers.

By 2012, insurers had introduced 1,148 climate-change products and services in 51 countries, according to a review by the Lawrence Berkeley National Laboratory. If you’re an executive today, for instance, especially if your business emits carbon, you may be interested in a policy from Liberty Mutual that protects against what the company calls “the continuously growing wave of litigation stemming from the alleged improper release of carbon dioxide and other greenhouse gases.” If you’re poor and African, you may be interested in reinsurer Swiss Re’s early efforts to insure you and 400,000 of your compatriots against drought. A 2007 program promised an US$18 million climate-adaptation payout to subsistence farmers if the right “weather trigger” was hit, with premiums paid by international donors. 

In 2008, while investigating how the insurance industry was faring in a warming world, I rode into a series of suburban wildfires near Los Angeles with a fire chief who worked part-time for A.I.G., the giant insurer that was then on the verge of being bailed out by the federal government. The company operated a squad of private firefighters, and, as helicopters clattered overhead, members of the A.I.G. team mostly drove around in haphazard circles, checking on client homes and sometimes spraying them with a fire retardant. They snuck across police lines. They made sure that A.I.G. clients had been evacuated. They made sure that brush wasn’t too close to any A.I.G.-protected structures. They stopped to get tacos, sip sodas, and watch news about the fire on a taqueria’s television set. They exchanged uneasy glances with public firefighters. They parked their trucks on a residential street for the better part of an hour and watched the public guys battle the blaze. The privateers didn’t do much good that day—not even for their own clients—but they made good money.

A boutique firefighting service is just one way that the insurance company attracts “high net worth individuals” to its private-client group. Another way, available in parts of Florida, New Jersey, New York, Massachusetts, and South Carolina, is its hurricane-protection unit: a jump team of contractors that arrives at your house armed with tarps and hammers, racing to beat looters and rain. If there are any holes, it patches them. If your expensive paintings or sculptures are threatened, it evacuates them.

The National Climate Assessment is, in fact, just what Buffett suggests: an argument for more insurance. As we face the future, insurance can help us grapple with the true cost of the present—something that we’ve largely proved incapable of doing by ourselves.

Outside of government agencies, the insurance industry is the primary funder of climate-change research. A trade group is sponsoring studies on how climate change affects tornadoes and hail. Another is backing university research on land ecosystems in a warming world, especially forests and crops. A British company is focusing on hurricane intensity and temperature rise, while an insurer in Bermuda researches cloud seeding to see whether the storms can be stopped before making landfall. A.I.G., for example, just released a climate report of its own, noting “a disproportionate increase in the number of extreme weather events” in North America. Buffett is right: in 10 years, if not sooner, calculations are bound to change. Those paying for the best research will get it first and, when they see an immediate risk, they’ll immediately price it in. For their own survival and for the sake of their shareholders, they will have to. Insurance rates will go up. And, if the risk is deemed too high or regulators block massive rate increases, as took place in coastal Florida some years ago, insurers will exit the market.

If profits equal progress, however, the insurance industry is on the right track. While researching a book that I wrote on the topic, I found that, when Hurricane Andrew landed in Florida and Louisiana, in 1992, insurers were caught unprepared, disbursing $1.27 in claims for every dollar of premium earned, for a total of US$23 billion. Those insurers started paying attention, and raised rates accordingly. Total claims were almost twice that when Hurricane Katrina hit Louisiana 13 years later—but insurers still came out ahead, losing just 71.5 cents per dollar of premium. Industry profits were US$49 billion that year. We continue to gamble with our environmental policies. But the insurance industry, year after year, keeps winning. [Until they don't, and go away.]

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