If there’s one significant political impact of Hurricane Sandy, it’s that the disaster has brought the threat of climate change back into the national conversation.
"What is clear is that the storms we've experienced in the last year or so around this country and around the world are much more severe than before," said New York City Mayor Michael Bloomberg at a press conference addressing the hurricane.
New York Gov. Andrew Cuomo also chimed in
, saying after a tour of storm-hit areas, “Part of learning from this is the recognition that climate change is a reality. Extreme weather is a reality. It is a reality that we are vulnerable. There's only so long you can say, 'This is once in a lifetime, and it's not going to happen again.' ”
Climate change was a reason Bloomberg cited as to why, despite initially stating he would not endorse any presidential candidate, he changed his mind after Hurricane Sandy and backed President Obama in an editorial on Bloomberg News
. “One sees climate change as an urgent problem that threatens our planet; one does not. I want our president to place scientific evidence and risk management above electoral politics,” he wrote.
While the jury is still out on whether Sandy will propel a shift in national policy towards actively combating climate change, the global reinsurance industry certainly recognizes the threat of climate change.
Just weeks before Sandy hit, one of the world’s leading reinsurance companies, Munich Re, issued a report titled "Severe weather in North America." The accompanying press release
stated, “Nowhere in the world is the rising number of natural catastrophes more evident than in North America… [and] anthropogenic climate change is believed to contribute to this trend.”
“Climate change-related increases in hazards – unlike increases in exposure – are not automatically reflected in the premiums. In order to realize a sustainable model of insurance, it is crucially important for us as risk managers to learn about this risk of change and find improved solutions for adaptation, but also mitigation. We should prepare for the weather risk changes that lie ahead, and nowhere more so than in North America,” said Munich Re board member Peter Röder.
On the surface, it appears as if climate change would be good news for primary insurers like Allstate
(NYSE:HIG), and Travelers
(NYSE:TRV), or reinsurers such as Swiss Re
(PINK:SSREY), Berkshire Hathaway
(NYSE:BRK.A), and Everest RE
(NYSE:RE). After all, if natural disasters become more frequent, wouldn’t these firms be able to charge higher premiums?
But it turns out that too much of a "good" thing might hurt insurers and reinsurers. Brendan Greenley of Businessweek
The business of insurers and reinsurers rests on balancing a risk between two extremes. If the risk isn’t probable enough, or the potential loss isn’t expensive enough, there’s no reason for anyone to buy insurance for it. If it’s too probable and the loss too expensive, the premium will be unaffordable. This is bad for both the insured and the insurer.
Steven G. Bazil, founding partner of Bazil McNulty, a law firm that represents insurance companies around the world, told Minyanville that his “clients would prefer a world of certainty and predictability. In such a setting, insurance and reinsurance covers can be properly priced to ensure a small measure of profit after all operating expenses.”
“My clients are not risky gamblers. They would much prefer low levels of risk and a high degree of certainty regarding their exposure rather than the ability to raise their rates due to increased risk,” Bazil continued. While the industry has recognized climate change as a legitimate threat, it does not appear that it is doing much to mitigate it, as least not in America. A 2011 report published by Ceres
, a national coalition of investors and environmental organizations, found that only 11 out of 88 US insurance firms had established climate change policies in place and that more than 60% of them did not have formal approaches to assessing climate risks.
In the report, Sharlene Leung, senior manager of the insurance program at Ceres, wrote:
With some important exceptions, the industry is largely focused on the implications of climate change for hurricanes and other coastal events. While this is understandable given the financial risks associated with major hurricanes, recent years have demonstrated that the climatic effects of rising temperatures are likely driving up aggregated losses from smaller, non-modeled events – including perils such as floods, droughts snowstorms, hailstorms, and tornadoes – in ways that severely cut into insurer profitability.
It’s not simply that US corporations are all sitting on the fence with regards to climate change. Major companies such as Nike
(NASDAQ:SBUX), and eBay
(NASDAQ:EBAY), for example, have formed a coalition called BICEP, or Business for Innovative Climate and Energy Policy, to lobby for clean energy policies as they worry that climate change will affect the global supply change, and in turn, their businesses.
Business and sustainability journalist Marc Gunther posited in a blog post
that insurers in America have been relatively silent on the issue because “they write liability coverage for corporations, including oil and coal companies, which are being sued over climate-related liability.”
“Acknowledging climate risk would be a risk for [any] company in an American context,” said Andreas Spiegel of Swiss Re, according to Yale Environment 360.
“There is the risk that the company or the managers would be held liable for their actions in relation to that.”
Ceres’ Leung also told the publication that the worry of lawsuits “makes it very much less likely [that they would speak up], and I’ve heard that explicitly from a number of legal counsels. [Insurers] are being advised to avoid any sort of attribution language between man-made emissions and damages.”
The impact of Hurricane Sandy, despite the severity of the damages, will be manageable for insurance companies. “The initial projections of the costs of Sandy I’ve seen put them only at about half of what the cost of Katrina was, so this is not a Katrina. And even Katrina was not a game-changer for the reinsurance industry,” explained Roberts DiUbaldo, a New York-based attorney from Edwards Wildman, whose practice is focused on US and international insurance and reinsurance companies, to Minyanville.
“There certainly will be plenty of claims and losses to be paid, but there’s certainly enough capital in the market to respond to these losses,” he said.
Still, it remains crucial that the industry starts to factor climate change into its risk pricing because that is the only way to get people to change their behavior, said David Friedberg, CEO of The Climate Corporation, which examines weather data to provide insurance to farmers.
“In certain parts of the country, we’re starting to see that farmers can’t grow certain crops they have attempted historically. Maybe homes shouldn’t be worth $10 million when they’re on the coast and every five years the coast will be flooded and the home will be destroyed… Look at the coastline in North Carolina… all the homes are wiped out yet again. How many times does that have to happen before we say we shouldn’t be building homes here any more?” Friedberg noted to Wired
“At some point, you’re going to have to have fundamental adjustments in economic value to account for the fact that the climate has changed.”