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Insurers: We're Not Picking Up the Tab for Climate Change


Friday June 20, 2014

[Note: A version of this musing first appeared in the Los Angeles Times]

Well, that took longer than I expected! Twenty years ago, I interviewed Frank Nutter, then and now president of the Reinsurance Assn. of America, on the threat climate change posed to the $2-trillion-plus global property and casualty insurance industry.

"It is clear," he said back then, "that global warming could bankrupt the industry."

But in the two decades since, the industry mostly limited itself to talk, sponsoring innumerable reports on the threat. Now a major insurance company has moved to protect itself, and it may be the most important milestone yet in the struggle to contend with global warming.

Illinois Farmers has filed nine class-action suits against municipal entities in and around Chicago for losses the company sustained when the sanitation system backed up, spewing geysers of sewage into hundreds of homes, after extreme storms in April 2013.

The suit explicitly says that officials in various governments were aware that climate change would bring more extreme weather and yet failed to take steps (such as draining parts of the system) that would have prevented the losses. Regardless of the outcome — courts give governments wide latitude in immunity from lawsuits — it puts an end to the charade that global warming is some scientifically uncertain threat far off in the future. [Subsequent to this writing, Illinois Farmers withdrew the suits, noting that they had served their purpose in encouraging governments to take preventive steps.]

It was predictable that a major industry player's first hardball action would be to protect itself from losses. Insurers bet their existence on being accurately able to detect, model and price changes in risk. The Farmers' suit tells the world that regardless of what politicians and pundits say about climate change, an insurer is going to try to avoid paying for losses that could have been foreseen and prevented.

Most property insurers base their pricing on historical data, which makes the industry retrospective and thus inherently conservative. This is one reason it has taken so long for insurers to react aggressively in the face of climate change — its losses only filter in slowly over many years. Even then, attributing blame is complicated by other factors, such as a vast increase in the building of ever-more expensive homes in coastal areas.

Moreover, a number of major insurers feel that the potential losses of climate change can be addressed through existing procedures for analyzing and pricing risk. For example, one thing they can do is simply leave the market in places that are highly vulnerable to foreseeable negative effects.

This was the case in Florida as insurers voted with their feet after the $26 billion in insured losses incurred by Hurricane Andrew in 1992, and after Florida regulators wouldn't let them raise prices to adjust for the increased risks created by a rapidly growing population in harm's way. In 2002, the state was forced to set up its own insurance pool to protect against losses from windstorms.

The Citizens Property Insurance Co., which charges below-market rates thanks to the voter-conscious state legislature that set it up, quickly became the biggest property and casualty insurer in the state. Noting its precarious financing, a report on the state insurance market prepared by Florida State University in 2013 asserted that "Florida could be one major storm away from the state having to take all wind risk."

Should such an event occur, Florida would cover these losses by issuing bonds, which would be paid off by a surcharge on all insurance policies. That means any insured Floridian, even those with just an auto insurance policy, would take a hit.

Thus, Florida is shifting the burden of future catastrophic losses arising from wind damage from the affluent who have built along to coast to all Floridians.

While Floridians wait for the next big storm, sea levels — the most obvious worldwide signal of global warming — continue their inexorable rise. Rising waters have already created Venice-like conditions in the Miami area.

All the nation's taxpayers have assumed this risk as insurers routinely exclude flood and storm surge damage from policies. This forces homeowners to seek coverage with the National Flood Insurance Program, a tax-dollar backed program also forced by political pressure to under-price its coverage.

Between the state program and federal flood insurance, the American middle class has been given the burden of insuring and subsidizing the affluent. Let's call it climate change socialism for the rich.

After news of the Farmers' lawsuit broke, I spoke again with Nutter. He said he too was surprised at how long it has taken for the risk of climate change to percolate through the insurance community. He also pointed out that Farmers is affiliated with the Zurich Group, which is noteworthy because European insurers, with global reach and exposure, tend to be more attentive to the risks of climate change than domestic insurers.

Is it possible that U.S. insurers are also affected by climate-change deniers? A number of recent studies by the Insurance Information Institute have singled out Florida as having the most exposure to the combined impacts of climate change, but its governor, Rick Scott, and Sen. Marco Rubio are on record dismissing the threat.

And yet everyone can see that sea levels are rising. Miami Beach Mayor Philip Levine told the New York Times last month, "We are past the point of debating climate change."

Now, as insurers begin to shift the costs of that reality through rate increases, exclusions, lawsuits and market retreat, consumers can ask such politicians, "Why, if climate change is a hoax, are we paying for it?"

contact Eugene Linden

Short Take

THOUGHTS ON WHY THE EARLY IPCC ASSESSMENTS UNDERSTATED THE CLIMATE THREAT

 

An oped involves extreme compression, and so I thought I’d expand on why I think the initial IPCC reports so underestimated the threat. Make no mistake, the consensus in the summaries for policy makers in the first two assessments did underestimate the threat. The consensus was that permafrost would be stable for the next 100 years and also that the ice sheets would remain stable (there was even a strong sentiment at that time that the East Antarctic sheet would gain mass). Moreover, in 1990, the concept of rapid climate change was at the periphery of mainstream scientific opinion. All these things turned out to be wrong

Of course, there were scientists at that time who raised alarms about the possibility of rapid climate change, collapse of the ice sheets, and nightmare scenarios of melting permafrost, but, fairly or not, the IPCC summary for policy makers was and is taken to represent the consensus of scientific thinking.

In my opinion such documents will always take a more conservative (less dramatic) position than what scientists feel is justified. For one thing the IPCC included policy makers, most of whom were more incentivized to downplay the threats. For another, many of the national governments that were the customers for these assessments barely tolerated the exercise and gave strong signals that they didn’t want to see anything that called for dramatic action, and this being the UN, there was a strong push to present a document that as many governments as possible would accept.

And then there is the nature of science and the state of climate science at that point. There is an inherent structural lag built in to the nature of science. For instance, the 1980’s were marked by the rapid development of proxies to see past climate changes with ever more precision. By the mid-late 80’s the proxies and siting had been refined sufficiently that the GISP and GRIP projects could confidently get ice cores from Greenland that they felt represented a true climate record and by then they also had the proxies with the resolution to see the rapid changes that had taken place in the past. Given the nature of data collection, interpretation, peer-review and publishing, it wasn’t until 1993 that these results were published.

It took nearly another decade for this new, alarming, paradigm about how rapidly global climate can change to percolate through the scientific community, and, even today, much of the public is unaware that climate can change on a dime.

As for the ice sheets, when I was on the West Antarctic Ice Sheet in 1996, there was talk about the acceleratio of  ice streams feeding the Thwaites and Pine Island glaciers, but the notion that there might be a significant increase in runoff from the ice sheet over the next hundred years was still very much a fringe idea.

With permafrost, the problem was a sparsity of data in the 80s and early 90s and it is understandable that scientists didn’t want to venture beyond the data.

The problem for society as a whole was that the muted consensus on the scale of the threat diminished any sense of urgency about dealing with the problem. Perhaps the best example of this was the early work of William Nordhaus. Working from the IPCC best estimates in the early 1990s Nordhaus published one paper in which he predicted the hit to the US GDP from climate change in 2100 would be about ½ of 1%. Nobody is going to jump out of their chair and demand action if the hit to the economy was going to be 0.5% of GPD a hundred years laterLibertarians such as William Niskanen seized on this and testified before Congress that there was plenty of time to deal with global warming if it was a threat at all.  

And then there was the disinformation campaign of industry, particularly fossil fuel lobbyists, as well as pressure from unions (the UAW in particular) and the financial community. These highly motivated, deep-pocketed interests seized on scientific caution to suggest deep divisions among scientists and that the threat was overplayed. Little wonder then that the public failed to appreciate that this was a looming crisis that demanded immediate, concerted action.

 



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