Tag Archives: climate change

A Price Tag on Climate Change

While agreement has grown in recent years that climate change is real, that humans are a major contributor and that it presents a grave danger, the consensus still leaves a lot of wiggle room. How fast is the world warming? How much influence do we humans have? How stark are the coming dangers, and when will they hit us?

Many have rallied to the climate change cause based on a perceived moral imperative – we owe it to our kids and grandkids to leave the planet in the best shape possible – but the realist in me knows that the effort will go to the next level once the cause turns into a clear economic argument. The argument would project costs related to climate change, writ large – the growing damage from wildfires and hurricanes, the damage to crops from increased heat, the costs of people having to relocate from the coasts as sea levels rise, etc. (Yes, the models are imprecise, but they’ve been getting better for a long time and will continue to do so.) The argument would then project the costs both of slowing the warming of the planet in the long run and of mitigating the short-term risks from those storms, fires and more. Once it becomes clear that the price of likely damage exceeds the cost of mitigation, then climate change expands from being a cause to being a calculation.

That may be starting to happen.

A group of universities and climate research organizations published a report recently that said that climate change contributed $8 billion of the $75 billion of damage that Superstorm Sandy wreaked on the Northeast in 2012. Based on extensive simulations, the group concluded that climate change had raised the water level by four inches in the Atlantic Basin. That doesn’t sound like much, but, once Sandy churned up a monumental storm surge at what turned out to be an extra high tide, the water level was 14 feet above normal in New York City – and the researchers concluded that the extra water from climate change meant that 71,000 homes were flooded that would otherwise not have been.

One data point does not a trend make (and some will challenge that data point), but I’m encouraged by this effort and hope that the real experts on risk – insurance companies – will increasingly weigh in on how to quantify what the costs of climate change will be and on how we might reduce those risks, so we can move from cause to calculation.

Investors are certainly encouraging interest. The Wall Street Journal reports that investments globally in funds focused on the environment hit $2 trillion in the first quarter and appear to have passed the tipping point. The WSJ says that investors are adding $3 billion a day to those funds and that $5 billion of bonds and loans are being issued daily to finance green initiatives – which would mean $3 trillion more for such initiatives just this year.

Since I helped with a book called “Resource Revolution” back in 2013, I’ve argued that a key approach to heading off climate change is to turn the market loose on it: Find ways to make it profitable to head off disaster.

Maybe we’re finally headed in that direction, if we can start to put a number on the costs of climate change while holding out really big numbers in front of those trying to innovate solutions.

Here’s hoping.



P.S. Here are the six articles I’d like to highlight from the past week:

State of Mental Health in the Workplace

As work from home continued, employers became even more aware of the impact of mental health and well-being.

Does Cyber Insurance Add to Ransomware?

There is literally no industry better positioned to fight cybercrime than the insurance industry.

Could COVID Help Life Insurance?

While the pandemic may have put the world on pause, it has put the modernization of the life insurance industry on fast-forward.

Simplicity, Magic in Life Insurance Sales

Everything we’ve learned about e-commerce design can be applied to the life insurance consumer–no matter where or how a policy is purchased.

COVID-19’s Impact on Replacement Costs

To make sure there are no surprises, asset owners across sectors need to ensure that their valuations are up to date.

Top Risk Concerns for 2021

Financial institutions face emerging risks driven by cyber exposures, a growing burden of compliance and the turbulence of COVID-19.

How Insurers Can Step Up on Climate Change

Insurance sector communities have invaluable expertise and resources to address society’s climate challenges, but that experience is not fully understood or harnessed into the mainstream climate, sustainable development and finance agenda. The United Nations’ 26th conference on climate change, known as COP26, is a strategic opportunity to finally and comprehensively bridge this gap.

With COP26 drawing ever nearer, the insurance industry has a gilt-edged opportunity to recapture its historic role as a key commercial shepherd of social transition and gain a seat at the main table in Glasgow.

Not since the age of industrialization has global society faced a challenge on the scale of climate change, and the insurance sector is uniquely placed to play a leading role in forging a workable solution; in fact, it is a challenge we are duty-bound to accept. 

When the Paris accord was adopted by 196 nations in 2015, the annual COP meetings instantly became the focal point of global efforts to tackle climate change. While some of the signatory nations have since made progress in building economic resilience against the physical and financial impacts of climate change, the urgency to do more is escalating; the demand for risk mitigation and adaptation strategies is accelerating in parallel.

Like few others, the actuarial sciences have a track record of providing support for strategic social transition at scale; the role as an architect of the social insurance systems that have underpinned many national reconstructions is well-documented.

More modern insurance tools, such as national catastrophe modeling, also have obvious applications to the climate challenge and reinforce our industry’s unique ability to accurately price risk over the longer term.

It shouldn’t be surprising that an industry built on the mathematical and philosophical foundations of the Scottish and wider 18th century Enlightenment is now well-placed to provide assistance in the quantification of climate-related risks and the evaluation of the related choices and trade-offs.

Since the early 1990s, the insurance industry has revolutionized its mainstream assessment of climate-related risks and integrated this into its core pricing, risk controls, regulatory disclosure and capital management. A decade ago, led by Munich Re and in concert with public and academic partners, the industry created a global facility to assess the seismic risks to properties, infrastructure and wider assets.

In creating the Global Earthquake Model Foundation, the aim was to support better planning, building codes, investment, insurance and disaster response to help save the millions of lives, livelihoods and assets that were at risk. We now have the opportunity to emulate that ambition and provide a program for building a global resilience model to support physical climate risk scenarios, stress testing and analysis for the communities, markets and assets that are exposed.

Because building climate resilience is the product of many factors, insurance is not a silver-bullet solution. But it is a necessary component because, when disaster strikes, the ability to rebuild lost homes, businesses, jobs and lives is central to any economic recovery.

Through insurance, communal risks can be shared across public, private and mutual systems, via premiums, taxation and hybrid systems. With sound scientific principles, economic sustainability and transparency as the foundations, costs, payouts and incentives can be designed to support affordability, risk signaling, resilience and wider solidarity.

By November, we should have set an objective to make access to basic climate-related insurance protection systems an essential component of a climate-resilient lifestyle. In conjunction with wider financial reforms and processes, we also need to ensure that companies and local and national governments have enough support to evaluate and formally manage their contingent climate risks and liabilities. 

Society’s history with physical, industrial and social transition has shown that changes need to occur at speed and across all economies. They will require the provision of public, private and mutual insurance (including hybrid approaches) to enable a financially, socially and politically viable process. This is not just about commercial insurance products and public services; it is about the adoption of “insurance thinking” with regard to risk assessment and the creation of economically sustainable risk pricing and risk-sharing mechanisms.

See also: Increasing Regulation on Climate Change

It is a mammoth task, but we don’t have to start from ground zero for insurance to play a role in achieving Net Zero. There are organizational vehicles already in place to help speed us along this journey.

For example, the Insurance Development Forum (IDF), launched at COP21 in Paris, was created in recognition of the critical role that risk management plays in the response to climate change. The Forum is a unique international institution that brings together private and public sectors to help countries to build the resilience they need to limit the physical, social and financial impacts of climate change.

The global challenge of closing the risk protection gap brought by climate change is at the heart of the IDF’s mandate, and the forum has already found success using its Tripartite Agreement project to support major sovereign and sub-sovereign programs.

This model of shared success, augmented by inclusive insurance and mainstream market expansion across many territories, provides the ideas and facilities to support the countries looking to protect their people and assets from the dangers of climate change.

If we seize the opportunity, society may look back on COP 26 in Glasgow as the pivotal moment in climate-financial history in the same way we now refer to COP 21 in Paris for its influence on climate politics. November also may be remembered as the month the insurance sector, a sleeping giant, awakened to fulfill its potential to help quell today’s climate emergency.

As the providers of risk transfer solutions, we have always been “in the room” for discussions on climate change, but we have yet to fully take a seat at the main table where the historic solutions will be forged. 

Insurance sector communities have invaluable expertise and resources to address society’s climate challenges, but that experience is not fully understood or harnessed into the mainstream climate, sustainable development and finance agenda. COP26 is a strategic opportunity to finally and comprehensively bridge this gap.

What Future Will We Choose?

Fast forward 15 years. 

U.S. catastrophe losses have leveled off at sub-$350 billion for the past three years, with 2035 marking a seven-year low. The Insurance Institute for Business and Home Safety (IBHS) just certified its 1,000th Fortified Community, meaning 75% of Americans now live in a jurisdiction with a truly holistic, fully risk-aware, climate resilience plan. New housing stock in the red climate zones slid to a 10-year low. New Orleans’ recent Resilient Community Bond put that blended finance/community-based insurance market over the $5 trillion mark. In Washington, Congress has already reauthorized the barely tested Resilient USA Risk Pool, updated information-sharing rules governing the National Risk Modeling Facility and tripled the matching funding for the Mangrove Project, which over the past decade has used mangrove restoration to protect 2.5 billion people from flooding globally. 

The insurance industry, rightly credited with driving a generational resurgence in analytics-based resilient thinking, became the top recruiter of young engineers and coders in the country.  

All of this is clearly fiction. Or is it? Each alternative reality, if pursued relentlessly, is entirely feasible. 

If we’re going to “flatten the curve” of weather losses in 15 years, we need to initiate large-scale community resilience starting . . . now.  If we want to help mayors, county commissioners and governors take the brave steps needed to protect their constituents (i.e., our balance sheets) we need to find new ways to arm them with the knowledge and financing to get the job done. If we want a holistic policy framework that aligns incentives around priorities informed by risk, we in insurance need to influence debates we aren’t even part of today. And if we’re serious about winning, we need to understand that the resilience sprint we’re running is the ultimate team sport that will require a relay of impact-oriented partnerships.

In short, between now and then, the insurance industry needs to stop wishing others could see the critical role we can play in preparing the country for climate change and just start playing that role ourselves. Because never before has so much rested on the ability to understand and manage complex risks. 

The challenges with our playing that role on climate are real. To start, the primary means by which we send risk signals is no longer enough — or even possible — in some cases. A highly regulated, 12-month, risk-based contract in a hypercompetitive market isn’t going to be terribly effective signaling risks that will emerge five, 10, 15 or 20 years later. We must find novel ways beyond terms and conditions to deliver the stunning bundle of risk knowledge and foresight we package into a “simple quote,” like we did with IBHS, the Insurance Institute for Highway Safety (IIHS) or Underwriters Laboratory.

The deeper challenge we face is overcoming our instinctive reflex to view climate risk as a threat to profitability not an opportunity for impact. When under a multi-variant, long-term threat, the natural tendency is to be defensive, skeptical and insular, and these survival instincts are clearly evident in the initial response to climate we’ve seen from many of our institutional voices in the U.S.

If, instead, we recognized that the world is essentially begging the insurance industry to step into its broader societal role, we would see promising paths open up before us. Paths to reawakening the awesome power of nature to secure resilience. Paths to aligning economic interests for the betterment of social interests. And paths to harnessing a sense of pride that only comes from a workforce that knows its purpose is making a difference.

See also: What the Recent Deep Freeze Portends

Now humor me again with another look at March 2036. Cat losses are linear, exceeding $400 billion, with no end in sight. Communities are paralyzed by non-stop recovery efforts, unable to make system-level changes in their risk profiles due to politicized risk projections and limited funding options. Governments are still inconsistent – in some cases contradictory – in setting pre-event incentives. The National Flood Insurance Program (NFIP) has been extended to cover personal auto flood losses to prop up the fastest-growing entitlement on the federal balance sheet. Residual markets have become the top insurer in 20 states. And the average age of an insurance sector employee just passed 54.

This, too, is pure fiction. Or is it? The answer is literally up to us. Because we are the ones who know that absent a fundamental reset the next 15 years will bring hotter weather, wetter storms, more destructive winds, higher water marks and untold human and economic misery.

We are the ones who know how to signal risk, amass risk-based capital and restore people’s lives. And we are the ones – in our actions and our inactions – making generational decisions today. 

Which future are you choosing?

Arrogance and Nature’s Deadly Hand

For millennia, humans have struggled to survive and thrive on a sometimes deadly planet. Earthquakes, plagues, crop failures, floods, fires all periodically wipe out enormous numbers of lives. In the late 20th century, the combination of prosperity, the end of the Cold War and dramatic advances in science and technology bred a widespread arrogance that we were at the “end of history” — that the combination of the moment’s geopolitical status quo and continuing advances meant we had reached an end state, immune to both humanity’s and nature’s volatility. 

This was clearly the height of arrogance. The pandemic and the return of deeply challenging geopolitical rivalries have already destroyed the complacency born of this arrogance. The growing global concern about the impact of climate change is another example of a tectonic shift in gestalt. 

In our four years at Jupiter, we’ve witnessed significant changes in thinking about climate change. When we started the company, almost no large companies on the planet were thinking about the impact of climate change on their businesses =- and a few still openly questioned whether climate change was occurring. Today, nearly every large company on the planet is at least thinking about the impact of climate change on their business, a few are taking meaningful action and questioning the existence of climate change is almost as humiliating in the business community as endorsing the violent occupation of the U.S. Capitol. 

And yet, the widespread power outages in Texas and the erosion of grid reliability in California are dramatic examples that an enormous amount of very hard work remains to be done. Jupiter works with power companies all over the planet on issues like how much risks have already changed — and how soon critical thresholds will be exceeded. We work across the global economy in insurance, banking, asset management, real estate, power, vaccine production, minerals and mining, chemicals, emergency management, national security, big cities and, yes, even oil and gas. Our customers are in places as wide-ranging as Texas, Florida, the Netherlands, Tokyo, China and Australia. I know with total certainty the world is grossly unprepared for the changes that have already occurred and are on the near horizon. Recently, a senior executive at one of the world’s largest companies said, “We get hit with billion-dollar-plus impacts, rebuild looking backward, ignoring the science, and get hit again. It’s just crazy.”

In many ways, Texas is the epicenter. Three years ago, Houston was hit by Hurricane Harvey, shutting down the region. What are less well-known are the multiple toxic chemical spills caused by the flooding, which simultaneously breached flood protection and caused loss of power for other containment. The U.S. Chemical Safety Board looked at this issue and concluded that companies’ investments were based on now-out-of-date planning assumptions. And, of course, it’s not just Texas; California’s power reliability is an embarrassment because of failure to adequately plan for ever-worsening risk from fire. 

Now, Texans shivered in the dark because a predictable event was not planned for.  

Some will choose this moment to debate what we really know about climate change or choices of renewables vs. fossil fuels. While those are important questions, they miss the larger issue. Risk is all around us — and the world’s planning assumptions for that risk are egregiously out of date. Whether extreme cold, flood, fire or pandemic and war, risks are at levels we currently don’t plan for in our businesses, with power at the very center of this issue. 

We live in a world designed for an environment that no longer exists.

It’s time to get real.

An Early Taste of Climate Change Disrupting Insurance

There’s a line that I first heard only a few months ago but keep running across: You may think you have a 30-year mortgage on your house, but you really just have a one-year mortgage.

Why is that? Because you have to renew your homeowners insurance every year, and your house is only affordable if your insurance is.

In the vast majority of cases, homeowners have nothing to worry about. Their premiums will change modestly from year to year. But those on the front lines of climate change — along coasts, where water levels are rising, and in parts of the country where wildfires are escalating and violent storms may become more frequent — may face sudden changes that could even force them out of their homes.

California, the bellwether for so many things in the U.S., is again in the lead on this insurance issue, showing how very complicated it will be.

Wildfires have burned more than 2 million acres in California this year. That is already an annual record even though September and October are historically the worst for wildfires.

The possibility of wildfires has put some 800,000 homes at risk of becoming uninhabitable because of soaring insurance premiums or of having insurers simply decline to cover them. State regulators ordered insurers not to cancel policies on those 800,000 homes, which are in or near dangerous areas, but the ban expires in December and can’t be renewed. As this New York Times article details, insurers, regulators and customers are all working to solve the problem — but not having much luck.

Data suggest that, in other areas, insurers are canceling policies or pricing homes out of the market. As the Times reports, “The number of households buying coverage from California’s high-risk insurance program, a costly and bare-bones alternative for people who can’t get private coverage, has increased by more than 50% between the start of 2019 and June 2020, to almost 200,000 households.”

And even that program is becoming less accessible: The article adds that the program “has asked the state for permission to raise its rates by 15.6%, after initially seeking an increase more than double that amount.”

Obviously, insurers need to be able to price based on the risk associated with each home, but it’s not that simple. People demonize insurance companies that pull out of a market or that jack up rates after a disaster — and people vote. So, regulators — at least, those who want to be reelected or reappointed — tend to limit rate increases and may block cancellations.

California has a further wrinkle (as it so often does): Insurers are only allowed to use historical data when underwriting policies. So, even though projections are for the fires to keep getting worse as the climate heats up, that information doesn’t count — it can’t be used in pricing.

State lawmakers attempted a compromise that would have let insurers use projections and incorporate some other costs into pricing, if insurers would make coverage more widely available and provide incentives for measures that would reduce fire risk. But consumer groups argued that the deal was too favorable to insurers, and it eventually fell apart.

Economics has to win. There’s no alternative. Assuming that climate change continues to worsen the wildfire threat in California and elsewhere, insurers will have to increase rates a lot or drop coverage, and homeowners in endangered areas will have to harden their properties to greatly reduce risk, pay those higher rates or move.

As I noted in last week’s Six Things, some 43,000 homeowners have already taken buyouts from the federal government and relocated rather than continue to fight nature in areas being inundated by coastal waters. A similar shakeup will have to account for wildfire and perhaps other types of storms, such as the derecho that damaged millions of acres of Iowa farmland last month and will reduce this year’s harvest by 25% to 50%.

But economics won’t necessarily win any time soon. The failure to reach a compromise in California suggests that the state will muddle along, with consumer groups and insurers at odds and with regulators caught somewhere in the middle.

Muddling along is hardly ideal. A clear vision that could lead to an actual plan would be far preferable. But the best I can suggest is that those of you who don’t live in California and don’t have to experience the dysfunction directly should keep an eye on what we go through. Lots of insurers, regulators and homeowners will likely have to confront issues related to climate change, so you might as well learn from the mistakes by those of us in California so you don’t have to make all of them yourselves when your turn comes.

Stay safe.


P.S. Here are the six articles I’d like to highlight from the past week:

How ‘Explainable AI’ Changes the Game

AI often performs its magic with little insight into how it reached its recommendations. “Explainable AI” makes all the difference.

The Future Isn’t Just for Insurtech

The new promise — the modern concept of insurtech — is a strategy driven by collaboration and innovation rather than disruption.

‘Virtualizing’ Your Customer Service

For the insurance industry, meeting increased customer demands with excellent service requires the right combination of technology and training.

New Operating Model for Insurers (Part 1)

Taking a few key steps will enable an insurer to resolve its operational challenges and lay the foundations for future success.

COVID-19 and Need for Analytical Insurers

Stronger analytics can assist insurers through the COVID-19 crisis, and create building blocks for longer-term business benefits.

Of Independent Agents, Heirloom Tomatoes

Direct vs agency is a silly fight. Neither channel maps cleanly to customer preferences. Both have advantages and disadvantages.