Insurance, Risk and Climate Change

Money talks and bull**** walks, as the old saying goes. When it comes to the debate over Global Warming, a formidable quantity of the latter is in evidence. Ideology and partisanship have badly skewed the debate over public policy, as journalists, politicians and special interests on both sides of the debate cherry pick the evidence that fits their preconceived views. I trust relatively little of what I read of the debate as filtered through non-scientists. And I’m even beginning to wonder about the scientists — they are, after all, beholden to the politicians and special interests for their research funding.

There is one group, however, that I am inclined to trust — the insurance industry. Insurance companies have skin in the game. Politicians can say anything they want, pass any law they want, and if they get it wrong, big deal, it’s only other peoples’ money. But insurance companies have a vested interest in accurately appraising the risks associated with Global Warming because, if they get it wrong, they’ll end up bankrupt.

That’s why I was particularly interested to view the presentation materials supplied by Elizabeth Costle, former Vermont Commissioner of Banking, Insurance, Securities and Health Care Administration and now a resident of McLean, entitled “Impacts of Climate Change on the Insurance Industry” as part of the testimony at the May 13 hearing of Gov. Timothy M. Kaine’s Commission on Climate Change.

The insurance industry is increasingly concerned that climate change could increase the frequency and severity of losses from hurricanes, flooding and severe winds. From the likes of Lord Levene, chairman of Lloyds of London, we now get such quotes as: “At Lloyds we do not subscribe to scare stories… We believe that a $100 billion dollar U.S. mega-catastrophe is getting closer for the insurance industry — and it could hit almost anywhere on the Atlantic Coast.”

As Costle notes in her slides, “The past may no longer predict the future so the cost of insurance is likely to include a premium for uncertainty.” Translation: Insurance premiums will rise. And, if markets are allowed to operate freely, they will rise higher and faster in areas at greatest risk.

One of those places is Virginia. Rates here increased 67.2 percent between 2001 and 2006, compared to 46.3 percent nationally. Ranked by assets exposed to increased flooding from sea level rise, Virginia Beach is the 10th largest coastal city in the world. (I presume that Costle is referring to the Virginia Beach-Norfolk metropolitan area, not the municipality of Virginia Beach.) At least we’re not Florida where insurance got so costly, if it was available at all, that the state government stepped in to buffer homeowners from the reality of the marketplace. For the moment, insurance markets in the Old Dominion are still functioning properly.

If Virginia’s state-level politicians are sincere about adapting to climate change, as opposed to posturing, they should stop prattling about cap-and-trade mechanisms for capping greenhouse gases — a decision that will be made in Washington, D.C. — and focus on what they can influence here in Virginia. At the top of the list: Resist the temptation to meddle with insurance markets as rates rise. High insurance rates send a signal to home builders and home owners: Think twice about where you build.

On a more proactive note, state and municipal government in Virginia can (a) work to protect wetlands, which function as natural buffers against storm surges, (b) stop subsidizing scattered development in areas exposed to rising sea levels, and (c) anticipate the impact on critical infrastructure like highways and power plants. Regarding that last point, a presentation by Chris Munson, senior manager-technology & management solutions for ICF International, was particularly germane. The federal government has begun the process of appraising the impact on infrastructure, including on Virginia. Virginia needs to follow up with more detailed study.

Finally, even though I think the cap-and-trade issue is a federal matter, not a local one, I have to plug a presentation by Noah Sachs, an environmental law professor at the University of Richmond, “The EU Climate Change Strategy: Lessons for Virginia,” which considers the European Union CO2 trading scheme in some detail. (Noah is a fellow member of the West End Gentlemen’s Eating, Drinking and Bloviation Club which convenes monthly to fulminate on such topics as Global Warming.)

Just one set of numbers from Noah’s presentation drives home the argument we’ve made here at Bacon’s Rebellion that there is vast potential for Virginia to shrink its energy/environmental footprint. In 2005, per capita energy consumption in Virginia was 345 million BTUs. In Germany, per capita consumpion was 176 million BTUs. Our standard of living may be higher overall, but it’s nowhere close to twice as high. We waste a lot of energy.

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  1. Groveton Avatar

    “Resist the temptation to meddle with insurance markets as rates rise. High insurance rates send a signal to home builders and home owners: Think twice about where you build.”.

    —Jim Bacon

    “Prices are important not because money is considered paramount but because prices are a fast and effective conveyor of information through a vast society in which fragmented knowledge must be coordinated.”

    —Thomas Sowell

    While Mr. Bacon makes a number of good points there is one problem with his analysis:

    energy <> carbon emissions

    For example, France uses more BTUs per capita than Germany but generates considerably less carbon per capita. Why? Because France generates a very high percentage of electricity from nuclear power.

    Another problem with Mr. Bacon’s analysis is his handling of carbon cap and trade agreements. While correctly writing that such legislation will be federal he forgets an important question –

    What will be the impact of the General Assembly’s decision to re-regulate Dominion – Virginia in a cap and trade world?

    As I understand this regulation, Dominion – Virginia will be guaranteed a return on investment for the facilities it builds to generate electricity for consumption in Virginia. If I understand this correctly (and I may not), this guaranteed ROI will be after any payments Dominion makes under any type of carbon tax legislation designed to allocate the true costs of carbon based pollution back to the polluters.

    Mr. Bacon favors insurance prices being kept in line with the actual cost of risk. That’s a good point. Mr. Bacon also believes that energy conservation will reduce carbon emissions. That’s true but incomplete. I believe that the Virginia General Assembly has partially indemnified Dominion shareholders from risks borne by Dominion – Virginia. If Dominion – Virginia builds electrical generating capability that becomes unprofitable because of carbon taxes the state (through the rate payers) will guarantee an ROI on those facilities. This will not only possibly protect Dominion shareholders from the consequences of Dominion – Virginia’s management it will also possibly retard the generation of electricity from low carbon sources. After all, if the taxpayers and rate payers are insulating Dominion – Virginia’s management from the risks of carbon taxes – whay should that management care about the risks of carbon taxes. And if shareholders can invest in a company that generates electricity without facing the risk of carbon taxes why would they invest in a company that generates electricity from alternate means (partly) to avoid the risk of carbon taxes?

    In other words, why doesn’t the argument for full pricing in insurance also apply to full pricing for electricity generation?

  2. Jim Bacon Avatar
    Jim Bacon

    Groveton, You’re certainly right to point out that France owes its lower per capita carbon emissions in large part to its development of nuclear power. As you may recall, I’ve been a big booster of nuclear power, too, so I don’t think we disagree on that point.

    Your speculations regarding Dominion are very interesting, particularly the point that the General Assembly may have indemnified Dominion from the negative impact of cap-and-trade legislation.

    Avenues for further explanation… Who is writing cap-and-trade legislation in Congress? Why, noe other than Virginia’s very own Sen. John Warner. From Warner’s website:

    On August 2, 2007, I joined Senator Joseph Lieberman (I-CT) in releasing a proposed framework for the America’s Climate Security Act of 2007. We are currently using this framework to draft a bill, which we then intend to move through the Subcommittee on Private Sector and Consumer Solutions to Global Warming and Wildlife, of which Senator Lieberman and I are the Chairman and Ranking Member respectively.

    Furthermore, I joined my colleagues Senator Lindsey Graham (R-SC), Senator Mary Landreiu (D-LA), and Senator Blanche Lincoln (D-AR) in introducing the Containing and Managing Climate Change’s Costs Effectively Act (S.1874). This legislation would allow market-based remedies to be applied in times of significant adverse impacts to the economy.

    Is it possible that Dominion has had some influence in drafting the legislation? Well, consider that last June, Anne Loomis, Warner’s chief of staff, joined Dominion’s Washington lobbying team. Draw your own conclusions.

    At the time, I interpreted the Loomis hire to Dominion’s anticipation of a fight over the National Interest Electric Transmission Corridor (an issue that is linked to the controversial transmission line through PEC country). Perhaps I was naive. Perhaps Dominion was shrewd enough to get a jump on the writing of cap-and-trade legislation, an issue of far greater import on its profitability.

    Some enterprising journalist with time and resources to invest in a great story would pursue the following lines of inquiry: (a) to what extent was Dominion involved in writing Warner’s cap-and-trade legislation, (b) how would the legislation impact Dominion, and (c) did the electric re-regulation legislation written crafted at the state level by Dominion anticipate cap-and-trade in any way?

  3. Waldo Avatar

    The insurance companies that insure insurance companies against catastrophic losses (known as reinsurers — these are the folks who paid out for 9/11) started raising their rates in costal areas back in 2001, when it became clear that rising sea levels and the loss of wetlands would create some real problems for them in the event of something as minor as a class 3 hurricane (i.e. Katrina). They’ve steadily raised their rates ever since.

    Insurance companies employ a good number of the world’s leading climate scientists and meteorologists. No dopes are they — they don’t want to provide flood insurance on 1M square miles destined to be permanently underwater.

  4. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    Why does it seem that lately there is this perceived notion that the Average Joe is to be priced the full cost of whatever? Yet when it comes to business, well, Joe should pay for that as well.

    The news is full of stories about how Joe got himself into the housing mess, and should accept the responibility and consequences. Yet when it comes to the companies that provided the loans, and now face losses, they should be made whole at taxpayer expense.

    Now we have the carbon footprint business, where Joe should not only pay higher prices for energy, but should also subsidize the energy companies that provide it. I’m sorry, but as we have been reading, Joe is out of money. Whether it’s because of chasing the American Dream, or being forced to pay for everyone elses dream, Joe is headed for the bread line while big business and their cronies in Congress make out like the bandits they are.

    Instead of giving incentive for Joe to gain access to tools that may make us energy independent, these crooks go out of their way to force Joe to pay for ‘their’ solution. All of which is why many economists believe we are headed for another depression. No house, no money, no job, the carbon footprint should really be small. And THAT’s no bull.

  5. Anonymous Avatar

    I’m still struggling with the issue of global warming, but what scares me just as much is what could happen to the average person or small business with a cap & trade system that is not highly regulated.

    Most everyone now agrees that a substantial portion of the doubled prices for oil relates to speculation. See, e.g., Ambrose Evans-Pritchard, “Germany in call for ban on oil speculation,” A German minister posits that 25% of the current price level has nothing to do with supply and demand, but only with speculation. The article also indicates that there is a growing movement among US congressional Democrats to impose “rules compelling traders to take delivery of crude oil, a move which would paralyse the market.” I suspect a Republican or two would sign on as well.

    If we see speculation in oil and foodstuffs, why would we not see the same thing in emissions trading? Of course, we would. The financial services sector of the economy is way too big. We need to move back to the production of goods and services and not trading futures and other pieces of paper.

    Trading of emissions caps should be limited to non-profit entities or for-profits that actually would create emissions. Thus, Goldman Sachs should not be permitted to buy or sell emission credits, but GM or IBM would. Take all of the speculative profit from cap and trade before it starts. The alternative is more financial manipulation.


  6. Jim Bacon Avatar
    Jim Bacon

    Darrell, Yeah, the average Joe seems to get hosed every time he turns around. No argument there. But here’s the sad part: If Joe isn’t discouraged from building in flood- and hurricane-vulnerable locations, and if we just continue on our merry way hoping that things will somehow work out, and if Joe continues building in locations we know are vulnerable, he’ll get totally and utterly hosed come the next hurricane.

    I’m not at all convinced that Runaway Global Warming is happening. But there’s enough science out there to suggest that there’s a risk that it could happen. Darrell, you can either let the market be the arbitrator of the risk, or you can let the big government social engineers be the arbitrators. Take your pick.

  7. “But insurance companies have a vested interest in accurately appraising the risks”

    In appraising the risks, perhaps their guess is as good as any. It’s false, however, to assume these companies would (a) honestly convey those risks to the public, and (b) aren’t swept up by the same silly fads as the rest of high society. Do you think the insurance industry didn’t worry about the coming ice age in the 20s or 70s, shifting arguments along with the latest in disaster fashions? Here’s how I would describe their three-part global warming plan:

    1. Announce that the sky is falling
    2. Raise rates
    3. Profit

    The speech of a left-wing activist from Vermont hardly offers insight.

    The same game is played in automobile insurance, especially at IIHS which pretends to care about safety. Just think for a second what would happen if someone invented a 100% safe automobile — some kind of super-protective airbag that could withstand any impact and protect your car from dents. Would that be good for the insurance industry? Well, no, it would kill the industry because without risk, there would be no need for insurance. So what you see from IIHS, apart from the crash testing, is advocacy for every way possible to increase rates with traffic tickets.

    Honesty is not found in insurance.

  8. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    “there’s a risk that it could happen”

    There’s a risk I could be in a car wreck, but that’s never happened in the 40+ years I’ve been driving. I’ve never had a house fire or other calamity. That hasn’t kept the insurance company from boosting my rates every year.

    When Katrina hit, the insurance companies found every excuse in the book and dreamed up some more to keep from paying out claims. Then they went to their ‘social engineering’ buddies, who used to work for the same companies, to get relief from their obligations by raising rates to maintain their profits.

    So for you to consider the insurance companies as a model of clairvoyance, to me, is pretty short sighted.

    Do I think there is global warming? Sure I do. I grew up with a kid named Lonnie Thompson. I remember him as a pretty straight shooter. He became a world reknown expert on glaciers. His research is conclusive. Does that mean we should rely on big brother or big business to tell us what to do? Not on a bet. Neither entity has the trust of the people, nor our interests at heart. In fact, their methods have served to mute the efforts of guys like Lonnie simply because there is no trust left in this county.

  9. Groveton Avatar

    Jim Bacon’s point on insurance rates and risk seems legitimate to me. I think the insurance industry is sufficiently competitive to ensure market pricing. Therefore, systematically rising rates indicate systematically rising risks.

    Does the insurance industry engage in marketing? Absolutely. Would all insurers like to see everybody more worried about risk and more willing to buy insurance from risk? Absolutely. Is the industry in collusion regarding the unwarranted escalation of premiums? I doubt it. I don’t know for sure but I doubt it.

  10. Larry Gross Avatar
    Larry Gross

    Before Enron, I was pretty sure that industry-level collusion was a myth.

    Having said that, I am no adherent of Rush Limbaugh grand conspiracy explanations of most company or industry behaviors.

    As Jim points out.. the phrase “flood prone” is not just some idle phrase. It has real meaning and real consequences .. and there are real choices for people like “Joe” ….BEFORE he gets to the point where he is worried about insurance coverage.

    the same thing with autos and air bags.

    there are choices … both in what you buy and how you drive and when/where you drive.

    and insurance companies and re-insurance companies ? they can leave the market.

    Insurance companies are nothing more than a bunch of investors looking for a place to invest capital and if insurance becomes a bad risk.. they’ll take their money to other investments.

    so.. no one is “owed” insurance.

    and we’ve already seen this in place like Florida where government got involved and some of the companies decided to just stop doing business in Florida.

    the other thing we overlook is that many agencies of government do self-insurance.

    If the wrong type of hurricane does the absolute worst thing and destroys a tunnel in HR/TW, we can virtually guarantee that neither VDOT nor the evil insurance companies will pay to fix it and instead “Joe” will.

    and that’s the thing – with insurance or Dominion, it’s not the investors who pay.. it’s Joe.

    Joe pays the insurance premiums .. the same premiums that pay for Joe’s losses.. and any insurance company that is going to be able to pay off Joe’s losses has to collect enough from other Joe’s ahead of time to be able to do that.

    Companies and investors don’t pay these losses.

    If investors are free to put their money where they wish – why should any of us think that those investors would stay in the insurance business and watch their investments disappear into paying claims for insurance losses?

    Just think what would happen if insurance was not available at any price or it was, but the premiums were as much as your mortgage.

    If that became the case – do we think Government would “force” these insurance companies to provide “affordable” insurance?

    is it proper for government to tell insurance companies how to manage risk?

    Heck of a job Brownie!

  11. Groveton Avatar

    “and that’s the thing – with insurance or Dominion, it’s not the investors who pay.. it’s Joe.”.

    Kind of. I guess my point is that “Joe” has choices with insurance. You can’t watch an hour of TV without seeing an insurance company commercial asking customers to log on to their web site and check their prices.

    So, if Joe wants to switch insurance companies – I assume he can.

    However, Joe doesn’t seem to have these same choices with energy. Maybe he can use natural gas for some things, maybe he can use propane for some things. But these are a lot more than a web site away. Meanwhile, electricity has fewer choices.

    So, the state re-regulates Dominion – Resources. It’s easy to see what Dominion got – a guaranteed ROI. But what did Joe get? What kind of deal did the General Assembly drive as the elected representatives of Joe? That’s the question I just can’t answer.

  12. Anonymous Avatar

    Interesting post, but why do you make us slog through your disclaimers? You seem to be saying you don’t believe in global warming, then you say you do.
    Don’t be a Luddite! Cut to the chase! These disclaimers are like SOOOOO five years ago!

    Peter Galuszka

  13. Jim Bacon Avatar
    Jim Bacon

    Peter, the disclaimers are “so five years ago” only if you rely for information upon publications like Time magazine, the New York Times and those with a like-minded editorial slant, which have tried to shut down debate by arguing the “the science of global warming is settled.”

    The science is not settled. About the only thing upon which everyone agrees is that the level of carbon dioxide in the atmosphere is increasing rapidly. The extent to CO2 drives temperature increases, the rate at which temperatures are actually increasingly, the value of the global climate models, the impact of temperature increases upon the biosphere and human activity, and the best way to remedy the situation are all matters very open to discussion.

    I would recommend you or anyone else interested in the subject to consult “Environmental Effects of Increased Atmospheric Carbon Dioxide” to see that well-documented perspectives exist outside the alleged consensus.

    From the abstract: A review of the research literature concerning the environmental consequences of increased levels of atmospheric
    carbon dioxide leads to the conclusion that increases during the 20th and early 21st centuries have produced no deleterious effects upon Earth’s weather and climate. Increased carbon dioxide
    has, however, markedly in creased plant growth. Predictions of harmful climatic effects due to future in creases in hydrocarbon
    use and minor green house gases like CO2 do not conform to
    current experimental knowledge.

    I’m not saying that the authors of this paper are right and the conventional wisdom is wrong. I am saying that the scientific debate is not over. I’m also saying that the distillation of the scientific evidence by policy makers and the reporting of it by journalists is highly anecdotal and skewed to one side of the debate.

  14. Anonymous Avatar

    “You’re certainly right to point out that France owes its lower per capita carbon emissions in large part to its development of nuclear power.”

    If I’m not mistaken, European countires import more of they petroleum products already distilled. That makes their energy usage and carbon usage look artificially low, because they have exported the enrgy and emissions used and created by refineries to places like Dubai.

    Their usage is also low because of high energy taxes.


  15. Anonymous Avatar

    TO: Jim Bacon:

    From: Peter Galuszka

    Re: Disclaimer
    I think you should consiuder this draft disclaimer for any of your blog posts — just to kick ideas around.

    Disclaimer: It is harder to label James A. Bacon than it is to frisk a seal. He is neither a conservative nor a libertarian although at times he may seem like one. He may or may not be an environmentalist but in some highly limited ways, he is a conservationist, but maybe not. He backs the free market, capitalist system, unless, of course, it conflicts with the neo-socialism of his mentor E.M. Risse who wants all of you to be forced into two-bedroom flats of exactly 987 square feet each in an suburban inner circle a five minute walk from public transit. Not far from the Zentrum, or Zentrum Silver, if you are a senior citizen.

  16. Anonymous Avatar

    if you want to read some entertaining if not enlightening views AGINST the gloabal warming crisis check out:

    in which professor emeritus Philip Stott writes:

    “‘Global warming’ has become the grand political narrative of the age, replacing Marxism as a dominant force for controlling liberty and human choices. In this blog, I hope to be able to deconstruct the ‘myth’ in order to reveal its more dangerous and humorous foibles and follies. I shall focus as much on the politics as on the science.”


  17. Anonymous Avatar

    “Joe pays the insurance premiums .. the same premiums that pay for Joe’s losses.. and any insurance company that is going to be able to pay off Joe’s losses has to collect enough from other Joe’s ahead of time to be able to do that.

    Companies and investors don’t pay these losses.”

    You are almost right. The insurance companies pretty much pay out in claims what they take in in premiums.

    The profit comes from investing in the market with the float between claims. That is an area where the inurance companies are no better than anyone else. If there are big losses inthe market, you can expect to see premiums go up, just as f there were big losses from a hurricane.

    The insurance companies face a single point of failure when there is a natural disaster big enough to seriously affect the market.

    Yes, Joe pays, but that isn’t the point. The point is to spread the risk around. At least until some catastrophe strikes that it is so big that it spreads its own risk around.


  18. Groveton Avatar

    “If there are big losses inthe market, you can expect to see premiums go up, just as f there were big losses from a hurricane.”.

    Unless new entrants – without the historical losses – enter the insurance market. And, as Progressive and others have proven, insurance can be sold over the internet. So, the barriers to entry are falling.

    Yahoo! Insurance? Maybe?

    Groveton’s virtual insurance company? Maybe?

    Look for the incumbent insurance companies to push for even more state regulation to try to maintain barriers to entry.

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