Climate Agnosticism Vs. Insurance Companies
By Pierre Lemieux
Perhaps like many of the readers of this blog, I am a climate agnostic. Given the politicization of environmental issues and the unfounded scares of the last few few decades (see Paul Sabin’s book and my review of it at the Library of Law and Liberty), I am not sure that disastrous climatic changes are occurring nor that human activity is responsible or to which extent. I haven’t looked at the climate models that serve as a basis for the dire warnings. As much as I am willing to defer to a consensus among people who know things that I don’t, I also realize how forecasting models are uncertain, whether in economics or in a chaotic field such as climate science (remember that it is a meteorologist, Edward Lorenz, who discovered chaos theory). And even if climate change were to cause serious problems to a portion of mankind, these costs would be at least partly compensated by weather benefits for another portion.
More important, we should forget that individual liberty is the most endangered species in the world and should not be sacrificed to the “visible fist” of the environmentalist state, to borrow an expression that Murray Rothbard opposed to the invisible hand of the market. In standard (and narrower) economic terms, reducing the forecasted temperature rise by reducing carbon emissions may cost more than the climate change itself, or reduce the cost by only a small proportion. Our co-blogger David Henderson recently discussed this point in relation to the work of recent Nobel Prize winner William Nordhaus and of Texas Tech’s economist Robert Murphy (see “A Nobel Economics Prize for the Long Run,” Wall Street Journal, October 8, 2016).
If climate change were an imminent danger, one would expect the corporations for which money is at stake to take notice. Apparently, they are now taking notice, which seems to contradict part of my climate agnosticism. In 2016, an unprecedented forest fire in the oil-sands region of Alberta (a Canadian province) roared over an area larger than Delaware, burned down a large part of the town of Fort McMurray forcing its evacuation (see picture), and caused $3 billion in damages. The Wall Street Journal explains how this natural catastrophe is leading the insurance industry to reevaluate the risks of climate change: “Climate Change Is Forcing the Insurance Industry to Recalculate,” runs the title of the story. Speaking about one of the insurance companies hit by the damage, Avila PLC, the Journal writes:
Aviva studied the incident and concluded the wildfire was an example of how the earth’s gradually warming temperature is changing the behavior of natural catastrophes. Aviva increased premiums in Canada as a result.
The effects of the planet’s slow heating are diffuse. Predictions of the fallout are imprecise, and the drivers are debated. But faced with the prospect of a warming planet, the world of business and finance is starting to put a price on climate change.
Instead of whining (which is a more prevalent behavior among environmentalists and at the highest levels of the state), insurance companies are trying to find a way to price the risk and sell coverage:
“It takes a lot of premium, a lot of margin, to account for this increased uncertainty, and I’m not sure we’re doing a good job of reflecting this and charging appropriately for it,” said Marc Grandisson, chief executive of insurer Arch Capital Group Ltd., at an industry conference …
“What we call the protection gap is still huge,” says Edouard Schmid, group chief underwriting officer at Swiss Re. “We of course want to offer solutions around risks, including climate risks.”
As insurance companies are incited to correctly price the risk of climate change, their customers will be incited to take steps to reduce their insurance costs by taking efficient actions of their own–moving installations threatened by possible rising sea level, for example. Such private solutions are certainly preferable to coercive state intervention. We can expect markets to calculate costs more efficiently than politicians and bureaucrats.