Tag Archives: severe storms

Climate Change and the Insurance Industry

The cost of individual weather-related catastrophes is rising and at the same time, they are becoming more common. One measure is to to look at the frequency of events which cost over a billion dollars versus time. In 1988 there was only one event, a drought across a large portion of the United State whereas in 2018 there were ten, including hurricanes, tornadoes, wildfires, droughts, and floods. This year a new term has come to the fore, the bomb cyclone.

One could show all sorts of trends by picking only two data points especially with weather data which shows a lot of short term variability. But a clear trend exists and global warming can be tied to both the cost and frequency of weather events.

According to a Pew Research Center survey, drought is the one phenomena that worry people the most. Considering drought as just one catastrophe, they have become more intense, and last longer in recent times compared to the past. Not only here in the United States but globally. Many regions in the Middle East, Asia, and Africa are experiencing higher air temperatures, drier air, and more severe droughts. A NASA study has shown that a two-decade-long drought in the Mediterranean Levant is the worst in 900 years.

The economic impact of droughts is due in the main to reduced agricultural outputs, but the heat itself is lethal. In the database of billion-dollar weather events since 1980, four of the top ten most lethal events are heat waves.

The impact of climate-related risks falls most heavily on the insurance industry. Across the board, costs are rising. They are rising for property damage, healthcare costs, and even life insurance. Insurers know this – its what they do. One of the main activities of insurers is to calculate risk so they know how much to charge their customers in premiums. Because of their focus on risk, they know better than most just what the financial impact is of climate change.

The insurance industry holds assets obtained from premiums in investments, not cash. The industry is beginning to shift investments from carbon-intense industries. Eighty of the world’s largest insurers hold fifteen trillion dollars in managed assets. Currently, less than one percent of the investments are in low carbon industries that provide a solution to climate change.

California’s Insurance Commissioner Dave Jones leads a group called the Asset Owners Disclosure Project (AODP.) A report from AODP assessed the industry’s investment portfolios and found that leadership in the trend away from carbon-intensive industries is coming from European firms. US firms are at or near the bottom. Some of the biggest firms with the most to lose, giants such as Prudential, AIG, and New York Life are that the bottom of the AODP ratings for attention to climate change.

Personal retirement accounts, in aggregate, are even larger than the insurance industry investments. Increasingly, mutual funds have categories like the Social Choice account at Teacher’s Insurance and Annuity Association. The investment strategy here is to disfavor fossil fuel industries and favor clean energy strategies.

Dr. Bob Allen, Ph.D., is Emeritus Professor of Chemistry at Arkansas Tech University.