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Is the Insurance Industry Doing Enough to Address Climate Change?

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The increasingly unpredictable weather makes insurance risk modeling a challenge.

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MINYANVILLE ORIGINAL 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:ALL), AIG (NYSE:AIG), Progressive (NYSE:PGR), Hartford (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 explains:
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.
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