catallaxy files

catallaxy in technical exile

ClimateGate and Insurance

with 4 comments

One of the arguments we’ve heard is that global warming has been impacting insurance premiums. Perhaps it has. Here is a short article I wrote for the IPA Review in 2008.

In order to prepare the nation for the introduction of the ETS, the federal government has begun a large advertising campaign to argue that, without action, climate change will have a significant economic impact.

In particular one of their most widely distributed advertisements claims that ‘scientists warn that climate change will cause more severe bushfires, storms, cyclones and floods. This is already pushing up insurance premiums.’ Both these statements may be true in isolation-some scientists are warning of such things, and some insurance premiums are going up-but the federal government invites us to believe that the first is causing the second. This is, however, not the case. The government’s argument can be tested by looking at a more direct measure of damage from climate change-insurance losses.

In a paper published in the peer-reviewed journal Environmental Science & Policy, Ryan Crompton and John McAneney of Macquarie University have investigated the link between insurance losses and meteorological hazards. Using data from the Insurance Council of Australia over 1967-2006 Crompton and McAneney adjusted the insurance losses to normalised 2006 dollars. Doing so involves more than just accounting for inflation. For example, as population and wealth increases the loss from a meteorological disaster increase. Conversely, changes in building safety standards reduce losses from wind damage. Crompton and McAneney have taken these sorts of factors into account to standardise insurance loss data, to ensure they are comparing like with like. The results are quite startling. Cyclone Tracy destroyed Darwin in 1974 with an insured loss of $200 million-in normalised 2006 dollars that would be equivalent to $3.56 billion. It is quite rightly the single largest meteorological disaster in Australian history. But before Crompton and McAneney normalised the data, the ICA data appears to indicate that the 1999 Sydney hailstorm was the largest disaster in Australian history with an insured loss of $1.7 billion, but $3.3 billion in normalised 2006 dollars.

Crompton and McAneney conclude ‘there is no discernable evidence that human-induced climate change is significantly impacting insured losses’. The observed increase in insurance losses is largely due to an increased number of more valuable buildings.

They have a more recent one page description of their work with updates to include Black Saturday.

Collectively all of these studies suggest societal conditions are driving the increasing trend in disaster losses and, at least to this point in time, there is no evidence to ascribe increasing disaster losses to ACC [Anthropogenic Climate Change]. On the other hand, the success of improved building standards in reducing wind-induced losses from tropical cyclones is clear evidence that important gains can be made through disaster risk reduction. Moreover, land planning policies in hazard prone parts of this country that ignore the risk are inconsistent with their public safety obligations.

It is in this context that a letter from the National Association of Mutual Insurance Companies to the National Association of Insurance Commissioners in the United States is so interesting.

At the same time, proponents suggested that there was little room for doubt that “global warming is occurring,” as a 2008 Task Force white paper unequivocally declared. The white paper disposed of the debate over the extent and consequences of anthropogenic global warming in a single sentence: “[The Task force] believe[s] that there is ample evidence in support of this assumption in a variety of other reports and studies, so we have decided not to focus on the scientific aspects of global warming.”

That decision was certainly questionable in 2008. Today, it is untenable in our view. The unauthorized release in November 2009 of thousands of e-mails containing correspondence among scientists affiliated with the University of East Anglia’s Climate Research Unit (CRU) makes clear that insurers, regulators, and anyone else with a serious interest in climate change cannot afford the luxury of simply assuming that the “reports and studies” to which the Task Force white paper alludes present an accurate and unbiased picture of what is known about climate change.

The CRU e-mails show that a close-knit group of the world’s most influential climate scientists actively colluded to subvert the peer-review process (and thereby prevent the publication of research by scientists who disagreed with the group’s conclusions about global warming); manufactured pre-determined conclusions through the use of contrived analytic techniques; and discussed destroying data to avoid government freedom-of-information requests.

Viewed collectively, the CRU e-mails reveal a scientific community in which a group of scientists promoting what has become, through their efforts, the dominant climate-change paradigm are at war with other scientists derisively labeled as “skeptics,” “deniers,” and “contrarians.” The insularity and non-collegiality of these climate scientists had previously been noted in a 2006 report to Congress prepared by a committee of statisticians led by Dr. Eugene Wegman of George Mason University. The Wegman Report examined the body of research behind the widely-publicized “hockey stick” graph, which purported to show a dramatic and unprecedented increase in average global temperature during the twentieth century. After thoroughly discrediting the hockey stick graph, the report observed that “authors in the area of paleoclimate studies are closely connected and thus ‘independent studies’ may not be as independent as they might appear on the surface.” The report further noted “the isolation of the paleoclimate community,” concluding that “even though they rely heavily on statistical methods, they do not seem to be interacting with the statistical community.” When members of paleoclimate community were asked to explain and defend their work, “the sharing of research materials, data and results was haphazardly and grudgingly done.”

In short, because serious questions have been raised about the integrity of contemporary climate science, NAMIC believes it would be exceedingly risky for any insurance company to make important business decisions based on an uncritical acceptance of the dominant scientific paradigm on climate change. Put differently, we believe there is considerable risk involved in an approach to assessing “climate risk” that assumes the validity of any particular theory or set of beliefs about anthropogenic global warming.

If insurance premiums have been rising due to risks of AGW I expect that they should start falling. Indeed this is an oppourtunity for the ACCC to investigate whether or not any firms have made false claims to justify price increases. (Please don’t interpret this as approval of the ACCC as an organsation, nonetheless false advertising falls within their jurisdiction).

(HT: Reason via Chris Berg)

Written by Sinclair Davidson

January 16, 2010 at 10:53 am

Posted in Uncategorized

4 Responses

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  1. Another factor is that insurance companies are inclined to exploit fear – or, let’s call it perceived risk.
    After a major calamity, such as a fire or flood, property owners tend to check and increase their insurance, so (heartless though it sounds) insurers do well following a calamity – the claims are already provided for or laid off to reinsurers.
    So I would expect them to encourage climate change worries. I believe heads of some insurance companies have spoken about the grave threat that faces us all.
    Cui bono? is always a useful question.

    Ken Nielsen

    January 16, 2010 at 11:29 am

  2. Anyone familiar with the insurance industry knows that competition and actual claims, not perceived risk, are the real drivers of prices. Being a leader in anticipating climate change and jacking up your premiums will quickly put you out of business.


    January 16, 2010 at 1:47 pm

  3. Sure, Andrew, and that is why heads of insurance companies have been vocal about climate change risks.
    Partly to publicly suggest to the industry that rates will need to go up. It’s not just about rates – it’s also to worry people enough to get them to insure their risks and increase cover.

    Ken Nielsen

    January 16, 2010 at 2:55 pm

  4. How would they asses risk for AGW, as I can’t see how they would factor such a thing into their models?

    Insurance firms insure on a regional basis and sell out when they reach certain thresholds by laying off risk in the wholesale market.

    How could they possibly asses for risk on a local level when they have no clue what it means locally.


    January 16, 2010 at 3:23 pm

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