Entries tagged with “insurance industry”.


Well, Hurricane/Tropical Storm/Extratropical Cyclone Sandy is currently beating the hell out of the mid-Atlantic, and apparently generating rain from Rock Hill, SC (about 75 miles to my north) all the way to Montreal.  In Canada.  That is a band about 820 miles wide.  Earlier today, the heavy winds extended from Maine to South Carolina’s northern border.  Lower Manhattan appears to be underwater.  It is all pretty epic.

In all of the screaming and shouting, though, I have heard little about the possible dangers this storm could pose to our economy.  Or, for that matter, the global economy.  The damages from this storm are going to be spectacular – perhaps the most expensive single event ever, including the Boxing Day Tsunami.  I speculate this simply because the storm is hitting the enormously densely populated DC-to-Boston megapolis, which contains a heck of a lot of really expensive real estate (especially by global standards).  Far worse storms and events have hit populated areas on this planet, but I am not aware of anything of this magnitude coming ashore in an area this densely populated with high value real estate.  Assuming a good bit of this real estate is insured, the insurance industry – and more accurately the reinsurance industry – are looking down the barrel of a really, really bad day.  I have no idea who is exposed to what in this event, but I am sure a lot of folks are checking balance sheets to make sure they are not about to have an unable-to-cover-their-exposure kind of day.  There has been talk of this sort of problem in the reinsurance industry for a while, but the industry is pretty robust.  Last year it took a spectacular (and record) $105 billion in insured losses. I have no idea if Sandy alone will get us there, but it is a single event that could produce a very significant fraction of that total loss record. Those kinds of costs, all at once, are very daunting.

I’m also starting to worry about everyone who did not have flood insurance – which, I am betting, is a lot of people.  It costs extra, and many folks don’t have money to spare, so they may have skimped.  I doubt any state in Sandy’s path can afford to have entire chunks of productive neighborhoods in such high-value areas be treated in the manner some wards in New Orleans have experienced – i.e. abandonment, bulldozing, etc.  Which means somebody is going to have to step in and pay for reconstruction…which means public money, either in state or federal funds.

Finally, the NY Stock Exchange is down, possibly for days.  It is screwing up global trading by creating a gap in the trading day – basically, instead of largely continuous trading, there is now a sort of down time where prices close for a while, then pop open again when the next major market opens.  It is hard to know the trend in prices during those down periods, which is introducing a little extra uncertainty into markets at the moment.  I wonder what that uncertainty is going to cost?

Thanks Sandy. Nice job.

One of the things I am (not so) fond of saying is that when it comes to climate, I am not really worried about what I do know – it’s the things that I don’t know, and cannot predict, that worry me the most. The climate displays many characteristics of a nonlinear complex system, which means that we cannot assume that any changes in this system will come in a steady manner – even a fast but steady manner. Instead, the geologic record suggests that this system changes in a linear manner (i.e. slowly warms up, with related shifts in sea level, precipitation, wind patterns and ocean circulation) up to a certain point before changing state – that is, shifting all of these patterns rather dramatically into a new state that conveys the extra energy in the atmosphere through the Earth system in a different manner. These state changes are frightening to me because they are highly unpredictable (we are not sure where the thresholds for these changes are) and, at their worst, they could introduce biophysical changes like increased temperature and rates of evaporation and decreased rainfall with such speed (i.e. in a decade or two, as opposed to over centuries) that the rate of change outpaces the capacity of biomes to adapt, and the constituent species in those biomes to evolve. This is not some random concern about biodiversity – people seem to forget that agricultural systems are ecosystems; radically simplified ecosystems, to be sure, but still ecosystems. They are actually terribly unstable ecosystems because they are so simple (they have little resilience to change, as there are so few components that shifting any one of them can introduce huge changes to the whole system), and so the sort of nonlinear changes I am describing have particular salience for our food supply. I am not a doomsday scenario kind of guy – I like to think of myself as a hopelessly realistic optimist – but I admit that this sort of thing worries me a lot.

So, to put this another way: we are running like hell down a long hallway toward an open door into a darkened room. We can’t see what’s in the room, and it is coming up fast. Most normal people would probably slow down and enter the room cautiously so as to avoid a nasty collision with something in the dark. When it comes to climate change, though, our current behavior is akin to running right into that room at full speed and hoping with all our might that there is nothing in the way.

This is a really, really stupid way of addressing the challenge of climate change.

The good news on this front is that we are starting to see the emergence of a literature on the early warning for these tipping points. I had a post on this recently, and now the July issue of Nature Climate Change has a review article by Timothy Lenton on early warning of tipping points. It is a really excellent piece – it lays out what we are currently doing, shows the limitations of what we can do, points to significant challenges both in the science and in the policy realm, and tries to chart a path forward. I think Lenton comes in a bit science-heavy in this piece, though. While he raises the issues of false alarms and missed alarms, he spends nearly all his time looking at methods for reducing the occurrence of these events. This is all well and good, but false and missed alarms are inevitable when trying to predict the behavior of complex systems. Yes, we need more and better science, but we also need to be thinking about how we address the loss of policymaker confidence in the wake of false alarms or missed alarms.

To get to this point, I think we need to be looking to arenas where people have a lot of experience communicating levels of risk and the importance of addressing that risk – the insurance industry. Most readers of this blog will have some form of insurance – be it health insurance, life insurance, car insurance, etc. I have all three. Every month, I pay a premium for a product I sincerely hope I never have to use. I’d rather hang on to that money (with a family the size of mine, it gets steep), but the cost of a catastrophic event in any of these areas would be so high that I gladly continue to pay. We need to encourage the insurance industry (they are already working on this issue, as they stand to lose a hell of a lot of money unless they can get their actuarial tables adjusted) to start communicating their sense of the likely future costs of climate change, and the costs associated with potential state changes – and do so in the same way that they sell us insurance policies. Why do we have scientists working on the marketing of our ideas? We are not trained for this, and most of my colleagues lack the salesman’s charisma that the climate change issue so desperately needs.

It’s time for a serious conversation about how science and the for-profit risk management world can start working together to better translate likely future climate impacts into likely future costs that everyone can understand. Science simply does not carry the weight we need in policy circles – the good data and rigorous analysis that are central to scientific legitimacy are, in the policy realm, simply seen as means to achieving a particular viewpoint, not an ever-improving approximation of how the world works. Until the climate science (and social science) community grasps this, I fear we will continue to talk past far too many people – and if we allow this to happen, we become part of the problem.