Global warming insurance

Thoughts from Kansas (part of Scienceblogs): One of the best ways to illustrate the growing societal consensus on global warming is the reaction of businesses. An alliance of conservation groups, car makers, utilities and industrial manufacturers is backing a system of cap and trade which would reduce allowable carbon emissions over several years, and create a market in efficiency and carbon reduction. …

The industry I'm watching most closely right now is insurance. Whether it's harsher storms destroying homes (a problem exacerbated by greater density of homes in areas that were risky to begin with), the threat of lower agricultural yields, melting permafrost destroying foundations or just the risks associated with rising oceans, there is a lot to insure against.

Not surprisingly, insurers are catching on. Tim Wagner of the National Association of Insurance Commissioners explains "Insurance is priced based on statistics and probability. What climate change has done is create ambiguity and uncertainty in the pricing scenario." Insurance companies can't just plan for the average number of claims, they have to be prepared for an unusual streak of bad luck, and that means that greater uncertainty means higher costs, even if average risk doesn't change.

Some insurers are ahead of the curve, but others are lagging. Last year, Allianz Group partnered with WWF to produce a report on risks to insurers from global warming, and Allianz is cautiously optimistic. Board member Clement Booth explained "if we can find a way to provide insurance in the face of major changes, from the first transatlantic voyages to global terrorism, then we can also find new ways to both incentivize emission reductions and provide coverage." Traveler's offers premium deductions for hybrid vehicles, and AIG. A subsidiary of Allianz is offering reduced rates to energy efficient commercial buildings that meet the LEED standards, and benefits for customers who upgrade to more energy efficient heating and cooling. …

More concretely, they encourage insurers to work with regulators to allow increased rates for properties at greater risk from global warming. Many areas will be at greater risk of floods or fires in a hotter world, and some insurers are already abandoning parts of the marketplace because the risks are too great for the premiums they can charge.

Insurers are also advised to put their expertise at the disposal of planners and policy-makers. Insurance risk models can help city planners evaluate the risks and likely insurance costs resulting from zoning changes and different growth scenarios. Premium reductions for greenhouse gas mitigation which are currently voluntary programs may be worth mandating to reduce the collective action problem among insurers. Insurers could also work with urban planners to promote public transportation, which can cut emissions and reduce smog and traffic accidents.