Climate change and insurance markets: let’s focus on real solutions, not finger-wagging
I don’t know why I’m writing about this when our democracy is on fire. Maybe I need to focus on something cheery, like climate change.
The American Prospect has a couple of pieces up on insurance and climate change. One identifies a genuine issue, the other misses the mark.
In this piece, Alexander Sammon asks why insurance companies aren’t taking steps to fight climate change, given that catastrophes like wildfires and hurricanes cost insurance companies money.
The answer is simple. Insurers pay out claims when their insureds suffer losses due to natural catastrophes, but they charge premiums that cover those loss payments and leave insurers with a profit. In fact, more catastrophes will mean a bigger market for insurance and related products like catastrophe bonds. Think about it – if there were no natural disasters at all, there would be no market for catastrophe insurance. If anything, global warming will benefit insurers by expanding their market.
I am not claiming that insurance executives and investors are deliberately encouraging global warming for profit. The most significant effects of climate change on insurance markets will occur far in the future, so today’s executives just don’t care much about them. (Imagine you are an insurance company executive. Today you can a) schmooze a prospective client, b) work on improving your current product, c) meet with your regulator to get a rate change approved, d) meet with your auditor to answer questions about your financial statements, e) deal with an IT problem that is causing some policies not to issue correctly, . . . or z) focus on climate change. What would you do?) And even if climate change will ultimately benefit (or harm) insurers as a group, each company would prefer to see some other company bear the costs of encouraging (or slowing) climate change. It’s a standard free-rider problem.
Sammon also suggests that insurers are facing risks from investing in fossil fuels. Maybe, but a more plausible story is that insurance company investment committees have examined the risks involved and believe that fossil fuel companies are still worthwhile investments, in narrow economic terms. They may be proved wrong, but the same is true for any investment.
None of this is intended to suggest that insurance company executives and investors are moral angels. I was one, and I’m quite sure they aren’t. They are just doing what market incentives tell them to do. And that’s the point. Progressives should stop treating climate change like a morality play in which justice will prevail if only people can be persuaded or shamed into behaving better. That is a recipe for endless, tiresome corporate greenwashing and blather about “sustainability”, and ultimately for failure. We need the government to change the rules of the game to reduce the demand for fossil fuels by businesses and consumers.
The second article by Lee Harris focuses on government, specifically on the National Flood Insurance Program. This is indeed a serious problem, and it is a problem caused not by markets, but by misguided government regulation of markets.
In a free market for insurance, people who live in areas exposed to flood risk would have to pay more for insurance. In some cases, they would have to pay a lot more for insurance, and they would refrain from building in flood-prone areas. But the federal government offers heavily subsidized insurance that encourages people to build in flood-exposed areas. People who are planning to buy a home should consider looking into the different home insurance policies such as the ones from a bear river insurance company to protect the property.
Everyone knows this should be ended, but as Harris notes, politicians resist raising premiums in flood-prone areas because this will hurt their constituents.
There is a similar problem at the state level with the market for homeowners insurance which protects against hurricane damage. In many states, homeowners in areas exposed to hurricane risk are heavily subsidized by homeowners who live in safer, inland locations. These subsidies are large, but they are far from transparent. People building homes in fire-prone areas also receive subsidies.
The result of all these subsidies is that we are putting far more buildings in flood and hurricane and fire-exposed locations than we should. This is costly today, and it will make our climate adaptation problems much more difficult. Again, the problem here is not primarily the insurance industry, or markets, it is political interference with risk-based pricing. And I suspect it’s mostly driven by voters, not by corporate lobbying. (There is one potential market failure that Harris flags, the fact that pricing based on today’s catastrophe risks will not discourage people from building in areas that will become more vulnerable to catastrophes as the climate warms.)
We know what to do to fight climate change. Finger-wagging at insurance companies is not on the list. What is on the list is action by the federal government to decarbonize the economy, primarily by raising the cost of fossil fuels and using regulation and government purchases to encourage green electrification. Figuring out how to get meaningful legislation through our dysfunctional political system is the problem we need to focus on.
Unfortunately using market incentives I do not believe will solve the problem because a big part of the market is the economics of our elective system. That economics also works to prevent the government regulation and purchases.
If not for the economics of our politics, we would simple set the regulations and let the market reform within our set demands. Like we’ve done with many other things. Or at least we used to be able to do.
Why build and rebuild on the coasts of Texas when the hurricanes come, flood the shores, swamping the houses, and leave the unlivable? The gov allows then to rebuild and in the same manner rather than on stilts or mounds several feet higher than the land at sea level.
Why build a home lower than sea level and near swamps which are supposed to handle the overloads from the ocean from surges caused by hurricanes?
Why live 100 yards from the shore and expect to be safe?
When live so close to the Mississippi which wanders from its shores.
Should we be living in the desert expecting to use water the same as near the great lakes?
We expect to be reimbursed for our own mistakes.
In some places (much of coastal and island Florida) rebuilding is not allowed unless the buildings are raised (typically on stilts). In other places (poor parishes around New Orleans) flood areas are the only areas the poor can afford. Affordable housing is a huge problem all over the country.
Decarbonizing the economy needs to be done but doing it needs care. People want to maintain their lifestyles without paying a lot more for the energy needed to do so. Nice words to say that we should raise the cost of fossil fuels, but what is needed is current costs for reliable alternatives. Ignore the Thunbergs of this moment if paying attention to them means moving out in ways that seriously compromise material prosperity for tens of millions in this country (and elsewhere) before these equivalent alternatives are reliably ready. The world is going to decarbonize once and better 10 years later than some are convinced will be a catastrophe rather than 40 years later when the level of rage has finally moderated.
It is also possible that it is already too late to unscrew the pooch. Ma Nature is a bitch. She ain’t gentle. Ask any dinosaur. Oh, wait…
While the brains of dinosaurs were far too small for them to prepare and take measure to prevent the inevitable outcome, it is only our assumption that we are tangibly intelligent enough to take the necessary measures. Since we banned breeder reactors during the Carter administration, then I submit that our tangibly superior intelligence to dinosaurs assumes facts not in evidence. At least dinosaurs were victims of extraterrestrial bombardment by asteroids, whereas we have been the architects of our own demise. It takes a lot of energy to implement alternative energy from renewables on a scale that would support economic parity with fossil fuels. The longer we wait, then the more expensive the energy cost of implementing renewables will be as traditional energy sources become ever more constrained. The higher the energy cost of implementing the infrastructure to generate, store, and distribute energy from renewables, then the longer we wait. Three Mile Island was the signal to carefully replace fossil fuels, but we were afraid to boldly go where no man had gone before. So, looks like the cockroaches will inherit the stars.
We are already well on our way to dehumanizing the economy and it seems much easier than decarbonizing the economy. Why stop at man’s inhumanity to man. Why not go all the way to extinction?