An Interesting Perspective on Climate Change
March 6, 2007
Lord Peter Levene, chairman of Lloyd’s and a past British chief of defence, said the evidence for global warming had become “pretty overwhelming”.
“No one in the insurance industry seriously doubts that climate change is taking place,” he told an Australian British Chamber of Commerce lunch in Sydney yesterday. “For the insurer there are few greater concerns right now.”
Lord Levene says it is no coincidence that the 10 warmest years on record have all been since 1990.
“Glaciers are melting and sea levels are rising,” he said.
Lord Levene said 2005 was the worst year on record for natural disasters for property insurers, with claims of $A107.86 billion worldwide.
Hurricanes such as Katrina and Rita in the United States accounted for $A85.76 billion of this total. But 2006 was a far more benign year.
Lord Levene said some insurers had started pricing the risk of rising sea levels into premiums for property insurance for customers in coastal regions.
It’s normal to speak of the monumental monetary costs of combatting global climate change. Ask the chairman of one of the world’s largest reinsurance markets, and you will hear about the cost of maintaining the status quo. I don’t think this is limited to the insurance industry. If the cost of risk allocation (insurance) is increasing then it is implied that risk is also increasing. What are the monetary values of these increases in risk to other industries? It seems clear that the potential harm from global warming is so severe that it calls for the use of the precautionary principle.
March 8, 2007 at 6:53 pm
The fact that you have suggested that insurance companies are a voice of significance in the debate over global warming makes me very cautious of your blog. As I read more of the earlier articles, I will do so with a very critical eye.
As for this particular post, it seems more like a PR statement trying to justify an increase in insurance premiums than evidence that “global warming is so severe that it calls for the use of the precautionary principle”. Of course insurance companies are going to jump on the global warming bandwagon, wouldn’t you if you could earn billions of dollars by doing so? Remember that all corporations are driven by mandate and law to maximize profit. All decisions made by corporations serve this purpose, else they will cease to exist in a capitalist environment. Lord Levene made a business decision by acknowledging global warming, not a scientific or moral one.
I have problems with the following statement as well, “If the cost of risk allocation (insurance) is increasing then it is implied that risk is also increasing”. That is like saying, “If the cost of gasoline is increasing, then it is implied that the cost of oil is also increasing”. If you watch the stock market even slightly, you can see that this is not true. In November, just before elections, gasoline was at an annual low, yet the price per barrel was $62. Then, in December and January, the price per barrel dropped to 18 month lows of $55, yet gasoline prices increased. Currently oil is being traded around $60 a barrel, yet gasoline is 70 cents higher than it was in November. The point being that the price of gasoline, just like insurance premiums, is more a reflection of corparate greed and government impotency than it is of actual costs associated with production or risk evaluation.
-robert arriaga
March 8, 2007 at 9:09 pm
“The fact that you have suggested that insurance companies are a voice of significance in the debate over global warming”
I’m not sure that I made that suggestion, although it is not entirely absurd. Insurance companies do not jump on bandwagons. They are economists. In a capitalist market, insurance premiums are not set by insurance companies. All actors (insured and insurer) are price-takers. Market forces (supply & demand) set prices. Your framing of the issue is very misleading. You say, “That is like saying, ‘If the cost of gasoline is increasing, then it is implied that the cost of oil is also increasing.’” You’re not comparing apples to apples. The oil market is heavily influenced by OPEC, and the price of gasoline depends on far more than the cost of oil. e.g. state/national taxes, differences in transportation costs, etc. The insurance market is not heavily regulated, and thus, is not as susceptible to fluctuations in price.
I’m not sure that Lord Levene’s decision to acknowledge climate change was much of a business decision. I don’t much think it was a scientific or moral decision either. The fact is, everyone is being forced to acknowledge the problem. It is rightfully called a consensus. The point I was trying to make is that even market actors (who would generally be opposed to any sort of regulation) are recognizing the potential costs of global warming. The significance is not in the words of an insurance company. That is merely an indication that there are more costs for the competent businessman to consider than just the costs of regulation. i.e. the costs of inaction. My suspicion is that this phenomena is not limited the the insurance industry.