Bishop Hill Weather extremes don't harm insurance companies
Oct 7, 2015 Climate: WG2 ;)
With "Mystic" Mark Carney telling anyone who crosses his palm with silver (or, indeed, anyone who crosses his path) that the insurance industry is going to be sunk by climate change, it's interesting to see what the empirical evidence has to say on the subject. By happy coincidence, Ross McKitrick has just published a paper on just this subject. Here's what he says about it on his website.
Bin Hu and I have just published a study looking at how climate variations, in particular indicators of extreme weather, have historically affected the share prices of major insurance firms. The insurance industry has raised the concern that climate change poses a financial risk due to higher payouts for weather-related disasters. However, if extreme weather is increasing, presumably that means they have an opportunity to sell more insurance products as well, which may increase profitability. In our paper we examined historical data on a portfolio of insurance firms and estimate a three-factor model augmented with climate indicators. Short-run deviations in measures of climate extremes are associated with increased profitability for insurance firms. Overall we find that past climatic variations have not had a negative effect on the profitability of the insurance industry.
Reader Comments (10)
this is what the insurance industry lives from. Any company that has not already taken into consideration the most likely scenarios of climate change is ipso facto a company of incompetents and will surely fold for some other reason very soon.
this is why Carney's silly remarks have had zero effect on company's actions and valuations.it's like telling a meeting of heart surgeons how important a steady pair of hands is.Or lecturing Buzz Aldrin on how to walk on the moon.
A quiet collective laugh must have surely spread around the place.
I read something similar in a book about investment a couple of decades ago or so. It was mainly pointing out that smart-alecs who think they know what will make the stock market go down (or up) are frequently 100% wrong, even when the reasoning appears highly plausible. The cases in point that the author highlighted were indeed market prices of US insurance companies after major hurricane strikes.
The day an insurance company doesn't make money out of disasters I shall be looking for the Second Coming!
The problem with Carney is the same as with Cameron — got a green fanatic for a wife.
And from Warren Buffett last year:
www.cnbc.com/2014/03/03/no-climate-change-impact-on-insurance-biz-buffett.html
The effects of climate change, "if any," have not affected the insurance market, billionaire Warren Buffett told CNBC on Monday—adding he's not calculating the probabilities of catastrophes any differently...."It has no effect ... [on] the prices we're charging this year versus five years ago. And I don't think it'll have an effect on what we're charging three years or five years from now." He added, "That may change ten years from now."....
"The public has the impression that because there's been so much talk about climate that events of the last 10 years from an insured standpoint and climate have been unusual," he continued. "The answer is they haven't."
The "more extreme events" meme suits the insurers book perfectly. Perception of risk increases cost of premiums, no greater risks than before, profits go up, yippee!
I wonder if the twat who heads Aviva will read this.
In the UK, IT has allowed insurance companies to calculate risk with much more detail. Whether it is the risk of a car being stolen from a particular postcode, or the risk of a property being flooded, by storm water.
Certain locations have seen insurance premiums rise as a result, sometimes dramatically.
Insurance companies rarely go bust due to unforeseen circumstances. Climate science is going bust, because no unprecedented circumstances have occurred as climate scientists keep predicting.
Love them or hate them, insurance companies know more about calculating risk, than 97% of climate scientists. When climate scientists learn to do maths properly, insurance companies will take them seriously.
Yes, but on the other hand...
Back in the 90s I worked for an insurance firm for a while. They were taking on a lot of temporary staff because, along with all the other insurance firms, they were taking a bit of a beating over environmental lawsuits.
It seems that all through the 50s, 60s and 70s people had taken it for granted that they could cause as much mess as they liked and it would never come back on them - because it never had in the past. Some were dumping mercury-based waste down disused wells. Some were being paid to dispose of dangerous chemicals safely, and were simply leaving it in rusty oil drums at the town dump. One guy named Hernandez in Texas I particularly remember. He used to drive into peoples backyards while they were out, dump some toxic waste, and drive away again!
Of course, all these people, to their utter shock, were being sued, and were losing. The cost was largely falling on their insurers, who, like their clients, had never expected such a total change in public attitudes to pollution.
No, climate change will not scupper the insurance industry. New laws citing climate change, or even new judicial attitudes to claims involving climate change, well might.
Carney doesn't seem to understand how insurance works. The premia are calculated to cover the losses and costs of running the company, plus a profit.
If the premia are too low, then the insurance company has made a mistake and deserves to go under.
Insurance companies, allegedly, took a beating following the two Christchurch, New Zealand, eartchquakes five years ago. Curiously, the next time my house insurance came around, my then insurance company tried to more than double my premium. At that time I lived in one the lowest earthquake prone regions of New Zealand. Even more curiously, the representative I spoke to about it was adamant that I had to take it or leave it. I left it, but premiums are now at least 33% more than before the earthquakes. Insurance companies are not in business to make a loss!