Climate insurance

Lawrence Solomon
Financial Post
June 6, 2009

Contrary to conventional wisdom, fear of climate change has been the biggest boon in insurance industry history. Second in a series called ‘Climate Profiteers’.

Climate ProfiteersBefore the Kyoto Treaty of 1997, before the Rio Conference of 1992, before the UN’s Intergovernmental Panel on Climate Change’s first report in 1990 or even its creation in 1988, even before the first ever World Climate Conference in 1979 expressed concern that “continued expansion of man’s activities on Earth” may lead to climate change, the reinsurance industry spotted the potential that climate change had for its bottom line. (Reinsurers insure insurance companies.)

In determining the level of claims that insurers must pay out, man-made “climatic variations become most significant,” explained Munich Re, one of the world’s largest reinsurers in a 1973 publication, citing “the pollution of the Earth’s atmosphere” by CO2.

“We wish to enlarge on this complex of problems in greater detail, especially as– as far as we know– [climate change’s] conceivable impact on the long-range risk-trend has hardly been examined to date.”

Since those early days, when manmade climate change was a virtually unknown theory, other far-sighted reinsurers, chiefly giant Swiss Re, have joined Munich Re in aggressively warning of climate-change dangers. In doing so, the reinsurers have been doing their duty in maximizing shareholder profit.

Fear of climate change, in fact, has been the biggest boon in insurance industry history. Contrary to conventional wisdom, the insurance industry has no interest in minimizing future risks to the public, in climate change or in any other field. To the contrary, the more that risks exist and the more that the insurance industry can charge to insure against those risks, the larger the potential market for insurance industry products.

The insurance industry’s chief concerns are to minimize the risks to itself by determining the level of premiums that are commensurate with the risks — this is the job of actuaries — and to embellish the risks whenever it can, to drum up more business.

Nothing beats the drum better for the insurance business than the threat of looming catastrophe, and no threats have ever loomed larger than those from global warming — in the public’s mind, it is blamed for hurricanes, cyclones, flooding and other extreme weather events that represent many of the insurance industry’s most profitable business sectors. Swiss Re capitalizes on these fears by citing climate change as one of the five biggest causes for increases in property damage.

Not only do global-warming threats extend to all regions of the world, but global warming especially plays well in the emerging countries of the Third World — the focus for most predictions of catastrophe. This corresponds precisely with Swiss Re’s marketing strategy: As concluded in a 2004 Swiss Re report entitled Exploiting the growth potential of emerging insurance markets — China and India in the spotlight, “Emerging markets will be at the frontier of insurance in the 21st century.”

Yet although the Third-World insurance market is the world’s fastest growing, this potential remains largely untapped. “In many emerging markets, the costs of catastrophes are either uninsured or insufficiently insured,” states Swiss Re in its recently published report, Natural catastrophes and manmade disasters in 2008. “As a result, individuals and companies are vulnerable, and tend to be overly dependent on government or other international organizations for aid.”

Swiss Re laments the lack of awareness of the risks the Chinese run without insurance. “Between 1980 and 2008, Shenzen’s population grew from 300,000 to roughly 12 million. Given the history of powerful tropical cyclones hitting the South China Sea coast, the potential impact of this rapid growth on both insured and uninsured losses is enormous. [Swiss Re estimates show that] the total loss potential in China is enormous and that there is a strong need to develop insurance. Today, a [major catastrophe] would leave the vast majority of the losses uninsured. China serves only as an example. The situation in many other Asian emerging markets does not differ substantially from that of China.”

To raise awareness in China and the rest of the developing world, Swiss Re works with China and other Third-World governments to impress on them the future risks that they face from climate change. It sponsors international climate-change conferences that help shape the agenda for scientific discussions. And it works with the UN’s Intergovernmental Panel on Climate Change, where it is an official expert reviewer. These efforts at raising global awareness of climate change have been productive beyond compare. When the press reports the IPCC conclusions about the catastrophes to come, for example, it is reflecting, in part, an IPCC document influenced by the reinsurance industry.

The centrality of the reinsurance industry in the climate-change debate can also be seen in its close relationships over two decades with major environmental organizations, Greenpeace among them. Prominent U. K. environmentalist Fred Pearce, in a New Scientist article published on the eve of the 1997 Kyoto Protocol, lauded Greenpeace for having “shown the way” by engaging the insurance companies in the international climate-change negotiations, and achieving a “coup” by persuading the companies to speak out. In Greenpeace’s own account of its relationship with the reinsurers, published in Greenpeace & The Financial Sector –The Possibility Of Profitable Relationships Between Not-For-Profits And For-Profits, it documents its role in enlisting the aid of the reinsurers as lobbyists in aid of greenhouse-gas reforms.

In Greenpeace’s mind, the multi-trillion-dollar insurance industry may have been decisive in tipping governments to supporting climate-change legislation, and in this Greenpeace may well be right. Greenpeace may also be right in noting where the reinsurers most often chose to air their views: “in forums provided by Greenpeace, rather than one organized by government actors or international economic agencies.”

That Greenpeace orchestrated the reinsurers’ conversion into public advocates for climate change reform, however, is a delusion. The reinsurance industry, then as now, had an interest in extreme weather events and it knew where its interest lay — if CO2 did exacerbate climate, the reinsurers would have had a financial incentive to pump more of it into the atmosphere. Whether or not CO2 exacerbates climate catastrophes, the reinsurers have an incentive to make us believe that it does, and with many of us they have succeeded.

Read next or previous article in the Climate Profiteers series.

Sources for this column

Other Climate Profiteers articles: 

Enron’s other secret

Hot climate premiums

DuPont’s new game

Fill up with subsidies

Profitin’ in the wind

Carbon baron Gore

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