Hot climate premiums

Lawrence Solomon
Financial Post
June 12, 2009

How the insurance industry uses climate change to charge higher rates and post record profits. Third in a series called ‘Climate Profiteers’.

Climate Profiteers
The insurance industry’s refrain has held steady for decades: “The risks we face justify an increase in rates,” it argues before government regulators.
Just as steady has been the response from those who aim to keep insurance rates low — the major consumers and consumer groups, who challenge insurance-industry data with analyses of their own: “The insurance companies are overstating their risks in order to make unjustified profits,” they counter. “Don’t grant the insurance companies the rate increases they seek.”

Insurance is one of the world’s most heavily regulated industries — its profitability ultimately rests entirely on the decisions made by its government masters. Insurance is also one of the world’s most heavily politicized industries. Because government regulators feel the wrath of the voting public when insurance companies raise automobile rates on the young or the old, or house insurance rates on the poor who live in crime-ridden areas, insurers often fail to convince regulators to see things their way.

With one glaring exception — when insurance companies invoke climate change. With worsening climate change the accepted wisdom throughout much of society, insurance companies easily justify rate hikes by pointing to the heightened risk of extreme weather events that come of carbon dioxide emissions. The climate-change rationale for higher rates is so impervious to challenge, in fact, that even consumer advocates — historically the arch-nemeses of the insurance companies — will often back climate-change rationales for higher rates. As Florida’s Consumer Action Network explained its support for higher insurance rates after Hurricane Katrina, “we know there’s a decent chance that either natural cycles or global warming trends have put us into a cycle of increased hurricane activity that could last up to another 10 years.

“The insurance companies and their scientists have taken note of their increased hurricane losses … and have announced (through rate increases) what that cost is. We don’t want to hear it.

“But we must not only hear the truth but act upon it ….This will cost money, but you are going to pay either way.”

The insurance industry has not been a passive beneficiary of the widespread perception that carbon dioxide drives extreme weather events. This industry — generally considered the world’s largest with $3-trillion in annual revenues — has been quietly working to manufacture the global warming consensus since the 1970s, when it first warned that CO2 could lead to “the pollution of the Earth’s atmosphere,” then an almost unheard-of claim. Through its work with the United Nations Intergovernmental Panel on Climate Change and its member governments, through its sponsorship of international conferences on climate change, through its funding of environmental groups around the world and through its presence in academia, the insurance industry has helped make public opinion pliable to its perspective.

Take the Institute for Catastrophic Loss Reduction, one of the leading bodies that warns of climate-change catastrophe. It justifies the need for higher insurance premiums on the climate-change consensus among the industry, “that the frequency and severity of extreme weather events is rising, contributing to an increase in claims and costs.” This institute, affiliated with the University of Western Ontario, calls itself “an independent, not-for-profit research institute.” Yet it was founded by Canada’s insurance industry in 1998, it is funded by Canada’s insurance industry, its chair is the CEO of Co-operators General Insurance Company and its other directors include the CEO of State Farm Group Insurance Companies, the CEO of Swiss Reinsurance Company, the president of Lloyd’s Canada and the president of Royal SunAlliance Insurance Company.

Who runs its day-to-day operations? Its executive director is Paul Kovaks, well known in Canada as a lobbyist for business — previously he was a spokesman with the Insurance Bureau of Canada, the industry’s trade association and before that he represented the Canadian Manufacturer’s Association.

The institute does its job well, as do other industry-sponsored organizations. The insurance-industry consensus now includes government regulators, who have acquiesced to the industry’s most prized goal: to base rates on computer models of future climate-change catastrophe, rather than on the traditional means of basing rates — past experience of natural damage. With models, the insurance industry can truly insure itself against risk, particularly since it has largely resisted subjecting its models to public scrutiny on grounds of confidentiality.

The benefit of model-based rates can be seen in the wake of Katrina and the other hurricanes of 2005, the most active Atlantic hurricane season in recorded history. These hurricanes not only led to record property losses and record payouts by the insurers but also, because model-based rates had risen rapidly prior to 2005, to record after-tax profits — $44.2-billion, despite the unprecedented hurricane losses. In 2006, a low-hurricane year, the profit soared to $63.7-billion, another record.
These record achievements are all the more impressive given the insurance industry’s own data for disasters. Swiss Reinsurance’s 2009 Sigma report, the gold standard in the insurance industry, shows a steady upward climb in the number of total disasters. The climb, however, stems entirely from increases in man-made disasters — the number of natural disasters has not risen since the early 1990s.

Read next or previous article in the Climate Profiteers series.

Sources for this column

Other Climate Profiteers articles: 

Enron’s other secret

Climate insurance

DuPont’s new game

Fill up with subsidies

Profitin’ in the wind

Carbon baron Gore

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