Climate Changes and the Insurance Industry

Prosperity–it’s a word that comes to mind when we think about the United States of America and we are absolutely right about that. Post World War II, our economy has experienced astounding economic growth without much signs of slowing down, even to this day. In fact, this postwar period was when the US fortified its position as not only a global superpower, but also as the world’s richest nation. But in order to reach this standing of influence and wealth, our natural environment was taken advantage of and even completely destroyed in some locations.

Keystone environments including Florida’s Everglades, Austrailia’s Great Barrier Reef, and the Antarctic’s glaciers have been severely damaged by anthropogenic sources, leaving dependent surroundings struggling to survive. Resources including fossil fuels, fresh water, trees, and more have been extracted and consumed at irreplaceable rates for nearly a century. And unfortunately, we are now beginning to see the consequence of our economic escalation and our irresponsible management of the Earth’s limited resources.

As we begin to see the unraveling of the symptoms of climate change, it is possible that the major downfall of our currently upward rising economic growth can and will be climate change. Moreover, the mass flooding that will result from nearly every climate change related event will inevitably cause the economically crucial $3.2 trillion insurance industry to collapse as risks increase and premiums become too costly. Climate Change, also known as Global Warming, is a widely trending discussion topic all across news outlets, political platforms, and especially in the science community, and it is for a good reason. Simply put, it is the process of our planet heating up. Over the past 150 years, industrialized countries have been burning large amounts of fossil fuels including coal, oil, and gas, leading to carbon dioxide accumulation in the atmosphere.

Forests absorb huge amounts of this from the air and release oxygen back into it, acting as carbon dioxide recycling systems. The Amazon rainforest, for example, is so large and efficient at doing this that it is often called ‘the lungs of the Earth. Sadly, many rainforests are being cut down to make wood, palm oil and to clear the way for farmland, roads, oil mines, and dams in a process called deforestation. And moreover, our agricultural methods also contribute to the greenhouse gas presence. Believe it or not, the billions of cows we herd let go incomprehensible quantities of the methane gas that builds up in their digestive systems. All of these factors have been leading to an unhealthy amount of greenhouse gasses in the air. The and other gasses act like an invisible ‘shield’, trapping heat from the sun, and have increased Earth’s temperature by roughly over this past century. It is known as the “Greenhouse Effect”.

This anthropogenic Greenhouse Effect causes Climate Change and the more extreme and unpredictable weather patterns. Extreme weather, an event such as snow, rain, drought, flood, or storm that is rare for the place where it occurs, has happened long before humans had any impact on the Earth. However, since the presence of Climate Change beginning in the 80’s, the frequency and the average magnitude or strength of extreme weather events has increased and intensified. There is evidence that cold nights have decreased globally, for example, while warm nights have increased in association with heat waves.

Droughts, storm intensity, and heat waves have increased and will continue to do so. In most places, the number of heavy precipitation events, unusually heavy rainfalls, has increased along with flood frequency. Global Warming that results in increased evaporation, is the cause behind these more frequent and more extreme precipitation events. Because evaporation acts to cool land, more water vapor is available in the atmosphere for extreme precipitation events unusually massive downpours or snowstorms.

The former can be especially destructive, causing flooding. Moreover, for hurricanes and cyclones, while the frequencies have been constant, the strength and damage that the storms cause has definitely magnified. Warmer sea temperatures allow for hurricane intensity and duration to increase because the storms gain their energy from the warmth. Although it may seem paradoxical, the risk of extreme precipitation and flooding increases even as the risk of drought increases. Warmer air has greater water-holding capacity meaning that precipitation will occur in more concentrated events with longer dry periods in between. During the dry periods, soils dry and act like concrete.

During the intense precipitation events, water runs off rather than soaking in and sudden bursts of water tend to run off faster than they can be absorbed even under the best conditions. Additionally, flooding is extremely dangerous for properties, people, and environments as well. In 2007, flooding remained the most damaging of all natural disasters. One-third of all the natural disasters occurring around the world each year are floods, and more than 50% of disaster-related deaths are due to floods. That said, the general trend that we see is that much more flooding, rain, and water-related damage will occur, threatening the safety and increasing the risk of loss of property and wealth.

Now with the insurance industry, this increase of threatening extreme weather occurrences is a major issue. The basic concept of insurance is managing risk. In a typical insurance system, the members of some group who share a particular kind of risk? automobile drivers, homeowners? contribute money to a fund. The contributions are large enough so that the fund can pay for losses that will affect some, but not all, of the members of the group. Using this approach, all participants are secured against the chance of a certain kind of disastrous cost in exchange for a relatively small payment.

Insurance can either be a for-profit business or nonprofit. In for-profit insurance, payments from members of the insured group must be enough not only to create the fund to pay for losses but to pay for the profits taken off by the system’s owners. Profits are then decreased by payouts, so for-profit insurance companies have a motive to keep people out of the insured group who are likely to need payments. For example, in property insurance, companies wish to deny coverage to people whose property is more likely to be damaged or destroyed by floods, fire, winds, or other natural disasters.

Therefore, insurance is greatly affected by natural disasters, including those that are likely to be made more common or intense by climate change. Already, Insurance companies are adjusting their forecasts to take climate change into account. For example, Allstate Insurance, one of the largest insurers of private homes in the United States, stated in 2007 that it was “engaged in an ongoing evaluation of the subject of global climate change and natural catastrophes primarily as these factors relate to possible impacts on Allstate’s future risk exposures, including hurricanes”.

The company also announced that it keeps “abreast of the ongoing scientific and hurricane modeling research through regular discussions with premier hurricane modelers.” Reinsurers companies that insure insurance companies have been particularly alert to the risks of climate change. That just shows how complicated the three-party relationship between the insured, the insurer, and the reinsurer will end up being. Insurers are particularly concerned with properties along coastlines. Recently, sea-level rise has been accelerated by anthropogenic climate change, which has caused the top layer of the ocean to warm and expand.

Ice from glaciers has started to melt more quickly in Greenland and Antarctica as well. The effect of the rising sea is much greater for nearly flat shores, such as river deltas, swamps, and beaches, where each inch of sea-level rise may cause the sea to advance several inches, sometimes many yards, inland. As sea levels rise and more powerful hurricanes are caused by global warming, coastal properties will be increasingly vulnerable to damage and destruction more so than in the past. As a result, coastlines are changing worldwide, and are projected to change much more in coming decades and centuries as global warming continues.

One way that insurance companies are seeking to cut their own risk as they anticipate more damage to coastal properties from storms and sea-level rise is to cancel or deny coverage to coastal property owners. In 2007, for example, Hingham Mutual Group canceled 9,000 homeowner’s policies for residences in Cape Cod, Massachusetts, saying that their own reinsurance costs had doubled in the past year, forcing them to withdraw from the coastal market. Homeowners were able to get new insurance from other companies, but at twice the old cost and with extremely high deductibles, an amount of loss that the insured party must pay out of his or her own pocket.

If the planet continues to heat up, increases in hurricane wind speeds will lead to increased home insurance losses. “Increases in damages result in an increase in claims, which, for insurance companies, means higher losses and, for homeowners, may mean higher insurance rates.” It seems a safe bet that flood insurance premiums will likely shoot up in the near future. The National Flood Insurance Program has already been struggling for years and is currently $23 billion in debt. So, insurance companies have no choice but to increasingly deny coverage to coastal homeowners, due to climate change. At that time, similar withdrawals from at-risk areas by insurance companies were causing hundreds of thousands of policyholders to be dropped along the eastern coast of the United States in 2007.

For insurance purposes, a “coastal area” may even be an entire state: Allstate Insurance, despite its name, announced in 2007 that it would no longer sell homeowner insurance in the states of Connecticut, Delaware, or New Jersey. Those who cannot afford homeowner’s insurance must either sell their homes or risk having their personal finances wiped out by fire, flood, storm, or other natural disaster. In the inevitable case that an individual’s house is destroyed, the family would have to start over with everything from getting a new house to furnishing it to filling it again with personal belongings. Additionally, studies show that the costs of weather-related natural disasters have been increasing over the last half-century.

The fraction of worldwide weather-related losses that was insured rose from almost zero in the 1950s to 25% in the decade 1995–2005. Many factors contributed to these changes, including increased building in risky coastal areas, more buying of insurance, and climate change. When large numbers of people lack insurance coverage, whether, for health or property, society at large is at greater risk. Uninsured sufferers of disasters must either be rescued by governments at much higher cost or not helped at all. This means not only that the victims suffer but that the whole social fabric is strained by increased homelessness, unemployment, crime, and business. Eventually, a lack of an insured population would lead to the downfall of an economy, no matter how powerful it may be. Similar problems occur when insurance companies do not have enough money to cover the costs of a disaster.

Insurance companies are not always prepared for the extreme costs that weather events can entail. Most famously, Hurricane Andrew caused $45 billion of insurance losses in the United States in 1992 (a value in 2005 dollars), causing 12 insurance companies to go bankrupt. Insurance companies altered their practices after Andrew, and when the four hurricanes of the 2004 season caused $29 billion of damage, no large U.S. insurance company went bankrupt. But soon after in 2005, when Hurricanes Katrina, Rita, and Wilma gave rise to 250,000 flood-insurance claims, the U.S. National Flood Insurance Program would have been bankrupt if Congress had not allowed it to borrow $20.8 billion from the national treasury.

The world is very unevenly insured today, with insurance rates highest in the developed countries that are already best-poised to adapt to climate change, and lowest in poorer countries that are most at risk from climate change. Experts are therefore concerned both about how individuals, regions, and whole countries can be protected by insurance, as much as possible, from the rising costs of climate change. While all of these changes to the environment, and eventually the economy, are occurring due to what we call Climate Change, there are those who disagree with the whole notion of Global Warming. These individuals are called anti-realists.

They stand firm in their belief that climate change is a hoax or that is an example of fake science. These anti-realists have a number of reasons supporting their belief system including their personal experiences, religion, or the fact that there is no real “proof.” Take for example a common experience people have. Those who live in the Midwest might point out that they still have snow and ice in the winter. As the weathers they witnessed stay the same, they assume that climate change can’t exist because it would otherwise change their experiences. Realists, or those who believe in climate change, would, on the other hand, say that the seasons did change in recent years.

They might notice that winters are a little milder and that summer starts earlier and feels hotter and more humid. Some individuals like our current President, Donald Trump, have told the American public that he did not believe in climate change because he didn’t see any real evidence. Since his election in 2016, the President has even pulled out of the Paris Accords, a pact signed by several countries to change their environmental practices. Though there is evidence out there, those who deny climate change exists refuse to look at that evidence.

There are claims that any evidence that proves it exists is a type of fake science done by those who want to change public opinions. Others do not believe that climate change exists, because they do not believe in science and have separate religious views. These people include those in religious groups and sects that believe God made everyone and everything on the planet, also known as creationism. They believe that in the “end times,” Jesus will return and therefore, climate change is not a problem.

Many of those who deny climate change exists also deny evolution and refuse to rely on some of the scientific breakthroughs that occurred in the recent past. Finally, there are those who claim that climate change is a hoax because scientists cannot come to a mutual agreement on whether it exists or what causes it. While there is some evidence that climate change occurred because of human intervention, there are other studies that dispute this claim. Deniers also claim that global warming no longer exists and that the average world temperature remained consistent for several decades. There are even claims that teachers should no longer talk about global warming in schools. Climate change is an absolutely important topic that people around the world cannot stop discussing. There are realists who believe people should take steps to keep it from happening, but there are also anti-realists who deny the idea exists.

Regardless of whether you are a realist or anti-realist, or whether you agree that Climate Change is actually occurring or not, the reality is that extreme weather patterns are increasing in frequency and in magnitude. And, our economy and its huge insurance sector is bound to take a toll that may or may not be recoverable. That said, individuals should think about the placement or location of homes, buildings, and cities to minimize both risks and expenses. For example, you may end up factoring in climate change before you buy a home. Real estate agents and companies have been providing data that suggests home sales in flood-prone areas including floodplains and coastal areas have been growing at a slower rate than in counties that don’t have a reputation for flooding. For instance, in 2014  a source for comprehensive housing data, released its annual U.S. Natural Hazard Housing Risk Index.

They found that home sales had fallen below the national average in counties with the highest risk of earthquakes, hurricane storm surge, wildfires, and floods, while counties with the lowest risk for those natural hazards have seen home sales volumes increase faster than the national average. Purchasing a house in a disaster-prone area would mean cheaper homeowners insurance and no risk of losing your home to mother nature. People are going to have to be thinking about natural disasters and their homes more frequently than they used to. Moreover, government workers need to stop rebuilding expensive citites near coasts that were devastated due to flooding, hurricanes, or cyclones. Are they going to spend billions rebuilding cities that might get leveled again in just 10 years because of a hurricane? Insurers can also participate in helping individuals move to areas that are at lower risk of property damage.

Some companies have chosen to give additional discounts to households that choose “greener” and more environmentally friendly methods of living. For example, ‘green’ homes could potentially receive discounted rates because these homeowners’ roles in reducing climate change would help lower claims and thus lower rates. The discount would benefit the insured, but would actually be a greater gain for the company because there would be a lower rate of properties needing coverage. Economics professor, Childs even states, “I predict the insurance industry will offer more incentives, in the form of lower deductibles and more favorable premium pricing, to homeowners who take measures to make their properties more climate-resilient.”

At the end of the day, there is an overwhelming amount of evidence connecting hurricane and flood severity to climate change. Its effect of warming that adds moisture to the atmosphere fuels and feeds storms and, with sea levels also rising, will also worsen surges and flooding. As more intense hurricanes like Katrina or Harvey and crazy precipitation events occur, more claims and costs for damaged properties for insurance companies are going to “flood in.” And while the human impact of severe weather – on homes and businesses – is profound, the effects are going to be felt throughout the insurance industry.

Losses could cost 150 billion and could well result in a rise in premiums. Some would argue that meeting the costs of disasters is the insurance sector’s raison tre, but many feel that if they are unchecked, it will become unsustainable. And unless there can be greater resilience to recover from such storms, access to insurance may become more scarce. Already millions of homeowners do not have flood insurance so the problem of no insurance will lead to greater costs in the end by our government.

We have seen the most profound transformation of the relationship humans have with the natural world and in turn its threatening effects of our anthropogenic activities. Unfortunately, we are now and in the future going to be reaping the consequences of our worldwide economic growth and globalization. My hope is that Climate Change levels out and that we can live more sustainably, maintaining the incredibly crucial aspect of our economy–insurance.

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