Insurance companies are in the business of predicting future loss, and so must ensure that they reserve for such events. What happens when history is no longer a reliable guide for predicting the future?
“If climate change causes more volatile frequent and extreme weather events, you’re going to have a scenario where these large providers of financial products — mortgages, home insurance, pensions — cannot shift risk away from their portfolios,” Rostin Behnam of the Commodity Futures Trading Commission told The New York Times last year. “It’s abundantly clear that climate change poses financial risk to the stability of the financial system.”
More frequent floods, droughts, wildfires and hurricanes, as well as sea level rise, are the inevitable consequences of a warming planet, and their impact on everything from housing to food production are as far-reaching as they are frightening.
Pacific Gas and Electric, facing some $30 billion liability for damages from two years of California wildfires — a tab exceeding its insurance and assets — had little choice but to declare bankruptcy. “Today PG&E is confronting this risk from wildfires,” Michael Wara of the Climate and Energy Policy Program at the Woods Institute for the Environment at Stanford University told The Times. “Tomorrow it could be insurance companies . . . that are overwhelmed after an unexpectedly intense hurricane or series of hurricanes.”
Though much depends on the future rates of greenhouse gas emissions and the resulting severity of future warming, climate change is expected to decrease domestic production of corn, soybeans, and wheat. Higher prices, and consequently higher premiums (and subsidies), will inevitably follow.
Superstorm Sandy, in 2012, dealt a devastating blow to New York City, parts of New Jersey, and much of Long Island. Owing only to Sandy’s last-minute turn away from the South Fork, the storied Hamptons, where multi-million-dollar properties were too often developed practically to the ocean’s edge, escaped the worst of it. Nonetheless, it was immediately clear that higher, and perhaps much higher, insurance premiums would follow. How would the region bear a direct hit from a Category 5 hurricane?
Bowing to political pressure — specifically, constituents of legislators in coastal districts who would face drastically higher premiums — the National Flood Insurance Program, billions in debt due to years of disproportionate rates and repeated disasters, delayed enactment of the so-called Risk Rating 2.0 restructuring by a year, until October 2021.
If there is a bright spot in the insurance sector, the industry recognizes the threat climate change poses to its long-established business model. Some companies’ own practices are evolving as they simultaneously encourage policyholders to adapt and mitigate, and claimants to rebuild according to green standards.
CREDIT: THE ECONOMIST