Insurance: Paying For Carbon Emissions

by Ray Grigg

The actuarial sciences of the insurance industry have identified an implacable reality and placed a tax on carbon emissions. For anyone who wants insurance, payment is unavoidable. Protesting or complaining won’t change an insurance industry that functions with the cold logic of calculated risk — if risk increases, premiums increase. And this explains their carbon tax. The industry doesn’t need measured rises in atmospheric levels of carbon dioxide or higher global average temperatures to understand what is happening to weather. All it needs is the cost of claims.

In the relative microcosm of Vancouver Island, for example, claims related to fire and lightning caused by weather jumped from levels of about $1.2 million per year in 2010 and 2011 to $6.5 million in 2012. Corresponding claims for wind damage rose from about $250,000 per year to $2.9 million. Total claims for 2012 were $15 million, equal to the sum of the previous two years — with almost all the increases related to weather. Consequently, the annual premiums for the usual package of house insurance commonly rose by a hundred dollars or more.

Across Canada, the situation is similar. “There are more and more storms happening,” said Pete Karageorgos of the Insurance Bureau of Canada, “and we’re seeing extreme weather events that happened once every 40 years… that can now be expected to happen once every six years” (The Vancouver Sun, Jan. 9/14). Consequently, “the amount of claims that have been presented has been averaging about a billion dollars [more] a year over the last three years or so” (Ibid.). Extreme weather events that cost Canada less than $200 million in 2006, reached $1.2 billion in 2012. Domestic fires, which were once the principal cause of insurance payouts, have been replaced by flooding, the result of engineered drainage systems being overcome by torrential rainfall. Wind damage from powerful storms has move up to the second highest cause of claims.

“It’s just been five horrendous years in a row,” confessed Glenn McGillivray, managing director of the Institute for Catastrophic Loss Reduction. Just two events in the last year — June’s flooding in Alberta and July’s torrential rainfall in Toronto — brought the insured property damage to $3 billion. The costs to insurance companies of the devastating ice storm that hit Toronto and parts of Ontario, Quebec and the Atlantic Provinces during the last days of 2013, have yet to be calculated — the uninsured costs may never be known. One of the largest insurers of property in Canada, Intact Financial Corporation, raised premiums by 15 to 20 percent as a result of heavy losses from climate-related claims. Some home owners are simply denied coverage if they live in areas newly identified as prone to flooding.

In the United States in 2012, the arrival of Hurricane Sandy caused $65 billion in destruction to the US Atlantic coast — happily for the insurance companies, less than half was insured. The storm, however, has forced some property owners in New York and New Jersey to confront the options of moving away from shorelines, elevating their homes, or paying flood insurance premiums of as much as $31,000 a year (Associated Press, January 29/13). The same year’s drought in the US Midwest did $20 billion in crop damage, of which $17 billion was insured.

Outside Canada and the United States, the indications of extreme weather are repeated — except the numbers are correspondingly larger. Munich Re, one of the world’s largest re-insurance companies, has been using the best meteorologists, hydrologists, geologists and geophysicists available to understand and predict the increasing number of extreme weather events it has been noting since the 1970s, well before climate change became a term of common usage. Their insurance rates are rising as their actuarial studies reveal a clear indication of increasing risk from extreme weather.

Material damage, however, is just the surface of the problem for the insurance industry. Because it will insure everything from homes and crops to product delivery and sporting events, anything that creates uncertainty adds to risk and affects insurance rates. So heat waves that are now predicted to occur every two or three years in the US Midwest and central Europe, according to Munich Re’s research, mean that premiums for insuring anything remotely related — from soybean crops to shipping schedules — will have to rise accordingly. Because Southeast Asia is expected to experience the same heat events, except every one or two years, the complicating effects must be anticipated as more expensive insurance.

Droughts are particularly insidious — such as the 2011 one in Somalia — because they are usually persistent, with consequences that can be both devastating and widespread. As Josette Sheeran of the World Food Program noted, victims have three options: they can riot, migrate, or die. Regardless, they throw social, political and economic stability of local, adjoining and distant countries into turmoil — climate refugees, for example, send waves of disturbances around the world. The successive droughts in Russia in 2010 and 2011 caused a global grain shortage that threw international food prices into pandemonium, and have been connected to the Arab uprisings that are still echoing throughout the Middle East. These unanticipated conditions are precisely the unknowns that insurers can only address by increasing the price of premiums.

As weather becomes more extreme and unpredictable, the whole system of payment for risk becomes more expensive.

Every claim that is paid by the insurance industry is recorded somewhere in a Great Actuarial Ledger to become additional costs forwarded to future policy holders — most of whom do not realize that these increased premiums are actually carbon taxes.