Time to Cut Through Overheated Narratives at the Nexus of Climate Change, Disaster Loss and Insurance Rates
I’m planning to host a Sustain What “room for agreement” conversation in January with some of the analysts conveying starkly conflicting explanations for alarming changes in insurance rates - or even insurance availability - for property in regions pummeled by extreme weather, fierce fires or coastal surges. It’s kind of surreal, just in the last few days, to compare the conclusions of the following pieces:
The Uninsurable Future: The Climate Threat to Property Insurance, and How to Stop It - Yale Law Journal, December 3, by Dave Jones, director of the Climate Risk Initiative at the UC Berkeley School of Law and a former California state insurance commissioner.
From the conclusion (read the whole thing of course!):
The insurance crisis is driven by the climate crisis. In response to rising losses due to climate-driven events, insurers are increasing prices and decreasing the availability of insurance. Policy responses to date have focused on deregulation (Florida) or modifying existing rate regulations (California) to allow for higher rates conditioned on writing more insurance. The deregulatory approach comes at a heavy expense to policyholders, in the form of higher rates and the inability of less regulated insurers to pay claims when the next disaster strikes. Both approaches fail to address underlying causes of the losses—emissions from the fossil-fuel industry and increased development in high-risk areas.
The Climate-Risk Industrial Complex and the Manufactured Insurance Crisis - Dec. 8, by Roger Pielke Jr. This is the first post in a series Roger has announced on insurance and climate change. I know a lot of climate-focused friends have concerns about Roger but this nexus of climate dynamics and losses is his sweet spot. If you missed my conversation with him, do have a listen. Here’s a core point:
Climate advocates have embraced the idea of a climate-fueled insurance crisis as it neatly ties together the hyping of extreme weather and alleged financial consequences for ordinary people. The oft-cited remedy to the claimed crisis is, of course, to be found in energy policy: “The only long-term solution to preserve an insurable future is to transition from fossil fuels and other greenhouse-gas-emitting industries.”
However, it is not just climate advocates promoting the notion that climate change is fundamentally threatening the insurance industry. A climate-risk industrial complex has emerged in this space and a lot of money is being made by a lot of people. The virtuous veneer of climate advocacy serves to discourage scrutiny and accountability.
Neither Jones nor Pielke are alone in their corners. Somewhere in between is Moving Day author Susan Crawford (see New data shows insurance costs rising and home values sinking as climate risks grow).
What really bugs me is how climate-focused journalists have glommed onto the climate change driver of insurance troubles without adequate examination of pecuniary motivations of parties in the debate - particularly insurers and reinsurers themselves.
I encourage you to read Pielke and also Jessica Weinkle’s valuable Substack flow on insurance industry profitability and the climate crisis. Here’s her latest - posted while I was in mid draft): Have re/insurers views of climate change risk decreased US real estate values?
Here’s October:
I’m including an excerpt on the disconnect between growing profits and claims of an insurance implosion:
In comical fashion I received back to back contrasting social media posts about the insurance industry1, recently.
First, a LinkedIn post recycled an April story in The Guardian in which Günther Thallinger, former CEO of Germany’s Allianz Investment Management and now on the board of Allianz, is reported as saying that climate change is making risks uninsurable and so,
“That means no more mortgages, no new real estate development, no long-term investment, no financial stability. The financial sector as we know it ceases to function. And with it, capitalism as we know it ceases to be viable.”
The next moment, in my X feed, Artemis, the ILS info site, announces,
“Cat bond market expected return rises, 2025 could be third double-digit year in a row: Lane Financial”
Capitalism is alive and well after all.
Featuring the graph at the top of this post showing investment returns of catastrophe bonds, the Financial Times reported that this lucrative trend is thanks to the ideas about climate change,
Insurers are selling so-called catastrophe bonds at a record rate as they seek to offload the growing risk from climate change on to investors eager for high returns.
But if you closely follow the climate change science literature, industry loss analyses, climate science assessment reports, and associated debate it is apparent that the “growing risk from climate change” is limited.
Anthropogenic influence on the climate system is real of course, and there are many good scientific debates on the details about extreme weather but the overall impact on losses is somewhere between undetectable and a shrug.
Thus, if the reporting at the FT is accurate then it is the idea of climate change that has proven profitable.
READ THE FULL POST (Substack’s back-end shows audiences almost never click links; I don’t mind if you leave and come back).
Here’s a vital Weinkle read from February:
And don’t miss this foundational 2024 analysis by Weinkle, subtitled How Climate Change Hyperbole Makes America’s Insurance Problems Worse:
Here’s my visual overview of the basic concept of climate risk, of course:
I remain flummoxed by how many folks do not understand the yin-yang of man made greenhouse gas emissions. The statement by Jones, "Both approaches fail to address underlying causes of the losses—emissions from the fossil-fuel industry and increased development in high-risk areas", suggests the emissions are somehow unrelated to the benefits we all get - electrical power, heat, transportation, etc. This means he fails fail to understand, or has chosen to ignore, the crux of the dilemma, what Roger has dubbed The Iron Law - "When policies focused on economic growth confront policies focused on emissions reductions, it is economic growth that will win out every time".
You can see the move to pragmatism in the recent position statement by Bill Gates and now Tom Steyer. This does not mean we do not have important work to get to cleaner energy and mitigate the long-term climate risks. It can be both. Also see Rogers recent post on extremes cost modeling and Nature magazines recent retraction of a flawed paper. I'd love to hear Dave Jones comments on that episode.