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Let the Taxpayers Take Care of It
A new GAO Report tells us that unlike private insurers government insurers are not planning for the risks of climate change.
Major private and federal insurers are both exposed to the effects of climate change over coming decades, but are responding differently. Many large private insurers are incorporating climate change into their annual risk management practices, and some are addressing it strategically by assessing its potential long-term industry-wide impacts. The two major federal insurance programs, however, have done little to develop comparable information.
This would seem to put some of my free market friends who continue to believe that global warming is a leftist hoax in something of a bind. Is climate change real or are government regulators wise and farsighted?
Posted by Alex Tabarrok on April 24, 2007 at 07:10 AM in Economics | Permalink
Comments
Private parties have to take it serious because of the risk of being sued by fanatics. Or being regulated by agencies.
Posted by: Huggy at Apr 24, 2007 7:25:57 AM
None of the above:
1. Private companies buy media hype on a regular basis - see Y2K which turned out to be nothing.
2. Government fails to respond to threats all the time - see: innumerable examples stemming from lack of accountability, incentives, and transparency.
Posted by: anne at Apr 24, 2007 8:40:17 AM
Alternatively, the senior management in the current administration is in the global-warming-is-a-hoax camp. Bad decisions in government are often systematic, but they can also be simply wrong-headed.
Posted by: tsoodonym at Apr 24, 2007 8:44:35 AM
Private insurers must take any credible claims of possible future climate change seriously, as should we have significant climate change, they stand to lose a lot of money or even go bankrupt. Given that there is a serious debate within the scientific community about global warming, private insurers who have any bit of common sense will take it into account for risk manangement. Government insurance programs have little incentive to do this since if they are wrong, the government will always bail them out anyway, or at least that is what they assume.
Posted by: ZH at Apr 24, 2007 8:56:33 AM
Skeptics are not denying global warming, they are denying that it is primarly human-caused.
Posted by: Justin at Apr 24, 2007 9:04:42 AM
Totally cynical explanation: climate change offers a way to raise rates and get congratulated for doing it.
Posted by: Matt at Apr 24, 2007 9:10:40 AM
I would say this puts my statist friends in a bind because now the free market is responding faster to this "crisis" than the government.
Still, I think everyone is simply more aware of how the climate can change. I would like to point out the the Medieval warm period and the Little Ice Age as good examples. Whether or not it's out of our control is still the question.
Somehow I think the sun has much more of an effect on the environment than 6 billion human beings, but some call me crazy.
Posted by: Ed at Apr 24, 2007 9:17:10 AM
I'm skeptical of the influence of the human effect on climate and of "global warming".
Climates change, but I doubt that at this point we predict them very well.
http://www.sciencedaily.com/releases/2007/03/070315101129.htm
Posted by: ajkrik at Apr 24, 2007 9:29:11 AM
A stopped clock is right twice a day, and all that.
Posted by: Eli at Apr 24, 2007 10:32:54 AM
Is this a forum where programmers have to pop up and say "Yes, there were Y2K problems. I know because I was paid to find and fix some of them. And find and fix them we did. We also helped customers who knew they were on vulnerable legacy systems migrate off to products known to be Y2K safe."
I was confidence enough in the industry response that I saw around me that I invested a grand total of $40 in Y2K preparedness.
Now, will this repeat with climate? Will we respond, prevent disaster, and then will those less close the problem deny the story line?
Posted by: odograph at Apr 24, 2007 10:35:18 AM
No, the serious people aren't claiming that GW isn't man-caused. The
IPCC report is pretty explicit. What is left to doubt is the scale
and quickness of the damage. Will the effect be diabatic enough that
inefficiencies can be avoided?
Posted by: Chi at Apr 24, 2007 11:06:36 AM
"...see Y2K which turned out to be nothing."Could it not be argued that Y2K turned out to be nothing because businesses took it seriously and updated their software?
Posted by: Rob at Apr 24, 2007 11:18:27 AM
Y2K was totally different because there was an obvious problem. You could set your bank's system to Jan 1, 2000 and see that everything got messed up. The effects of climate change is based on inaccurate models.
Posted by: Matt at Apr 24, 2007 12:17:46 PM
"The effects of climate change is based on inaccurate models."
As opposed to anti-climate change being based on inaccurate models?
Posted by: odograph at Apr 24, 2007 12:26:47 PM
"Many large private insurers are incorporating climate change into their annual risk management practices"
I need some specifics, from what I've read in risk managemnt, risk has been reassesed due to wealthier people living in riskier areas (and previously modeling these riskier areas based on the old low risk demographics). Any potential increase in risk due to GW isn't significant.
Posted by: aaron at Apr 24, 2007 2:53:22 PM
Writing on GW in FEN seems to support Anne. It really looks like hype meant to sell products, strategies, and win customer and government empathy.
The main factors in reinsurance costs are listed in the article as 1)increased insurance penetration [more customers, also means more revenue] 2) growing population and economics activity 3) Increasing value concentration on coast 4)hazard cycles and trends in natrual and anthro climate change.
It follows, "It's hard to parse wich factors contribute which impact to the huge growth in losses, but important factors include recent fashion to situate expensive property in coastal and high risk areas, as well as the increase in vulnerable off-shore drilling in the gulf of mexico."
Control for the non-anthro climate change factors, and I expect the trend in "financial risk of climate change" to disappear. Especially when you consider that the primary focus of this article is hurricanes, which should decrease in both frequency and strength with warming. It's based on a very small data set and not at all technical.
Posted by: aaron at Apr 24, 2007 3:30:53 PM
Matt, A friend who works in reinsurance said that the industry saw Karina as a major boon. It was great excuse to raise rates.
Posted by: aaron at Apr 24, 2007 3:36:30 PM
"Given that there is a serious debate within the scientific community about global warming, private insurers who have any bit of common sense will take it into account for risk manangement."
There was serious scientific debate about whether global warming a) was occuring and b) was being caused by human activy twenty years ago. There isn't any debate in the scientific community now.
If you doubt this, go and read through the recent issues of the journals Nature and Science, the two most prestigious science journals, and you will find a very broad and very deep consensus amongst scientists that the earth is rapidly warming and that burning fossil fuels is the primary cause.
Alex, I don't understand why your "free market friends" should "continue" to believe that
global warming is a "leftist hoax". Surely you're making this up. "Leftist hoax" sounds like something a high school student would say in debate class. I don't see any connection at all between believing that markets are good and denying, despite what is now overwhelming scientific evidence, that human activity is changing the climate. What am I missing?
Posted by: Jeffrey Miller at Apr 24, 2007 4:21:37 PM
So the mass of prestigious scientists are ready to bet their reputations on predicting what the weather's going to be like one hundred years from now when their models can't even pattern what happened in the last hundred years? The right question is: why would anyone think, given the history of predictions, that anyone could correctly predict the weather over a hundred-year time span?
Posted by: Robert Speirs at Apr 24, 2007 4:38:40 PM
This is a blog about economics and peoples response to the marginal utility of a choice. Well then what is the choice of a scientist who wants to study the possibility that global warming is not anthropogenic? It is unspoken but someone who wants to make such a stucy cannot get funding. So what would be the choice of a scientist?
Besides, if you read the studies to do with global warming, few actually study whether it is in fact anthropogenic. Many of those calling themselves experts on global warming are in fact "experts" on its effects, not its causes. In fact, much of what we know is based on attempts at a few madels trying to explain warming. Those models don't tell us that GW is caused by humans, only that factoring in for the available variables, the only one that seems to be out of sorts with the model is the increase of CO2. But no work has been done to test these models against other possible causes (none of which take into account solar activity)because of the reasons I gave in the first paragraph.
If people here know about studies using models, you know how imperfect they are not just in being backtested (often the model has to be changed to fit the data), but also in then using them as predictive tools.
Posted by: AvnerUWS at Apr 24, 2007 4:55:45 PM
Everybody has a model. People above have models, even as they decry models. When someone says "Somehow I think the sun has much more of an effect on the environment than 6 billion human beings, but some call me crazy." That is a model. It isn't a very sophisticated model, but it is a model nonetheless.
Now the thing is, as you refine and test your model, bring increasing levels of sophistication and knowledge to it, it becomes at some point science.
That doesn't mean it is "right." It just means that it is following the age old human quest for more perfect knowledge.
Now, what's the alternative? As I can see it there is only one. That is to say that we don't want a better answer (though a better model), and to say that we will take whatever climate we get.
Sad choice, isn't it? Either whatever, or we try to understand, predict, and prepare.
Posted by: odograph at Apr 24, 2007 5:17:39 PM
Wind shear to reduce hurrican strength
"A new study conducted by two atmospheric experts, one at the University of Miami, has found that global warming is producing increasingly stronger wind shear over the Atlantic, and that might hinder hurricane formation."
Are insurance companies putting that in their models?
Posted by: Matt at Apr 24, 2007 6:18:54 PM
"Well then what is the choice of a scientist who wants to study the possibility that global warming is not anthropogenic?"
I disagree that there is some hidden agenda which is driving the scientific conclusions. There's not. People are following the evidence. The evidence is now overwhelming that the climate is warming and that increases in greenhouse gases caused by fossil fuel burning is the main factor. The evidence wasn't overwhelming 20 years ago, or even 10, but it is now.
If you have some firm evidence that there is a conspiracy at the NSF and other funding agencies not to do science but instead to engage in climate propaganda, I'm eager to hear it. Until then, your claims sound as plausible as most conspiracy theories do.
Posted by: Jeffrey Miller at Apr 24, 2007 6:19:11 PM
I would add my voice to those who disagree that a scientist's incentives lie in studying humankind's contribution to global warming.
I am sure there are many a cash-rich oil company (or more likely, a consortium) that would gladly part with a hundred million or so for privately funded research to support alternative theories of global warming causality. If only a reputable scientist would consider wasting his or her time on such horseshit when anyone with a pair of eyes and a working set of synapses understands that we're raping the environment.
I suspect there are some closeted "creative design" nut jobs amongst this readership. Talk about denial of reality.
Posted by: fustercluck at Apr 24, 2007 9:52:47 PM
That was supposed to read "intelligent design.:
Posted by: fustercluck at Apr 24, 2007 9:54:00 PM
"I disagree that there is some hidden agenda which is driving the scientific conclusions. There's not."
There is. The field of atmospheric studies has increased by some astronomical number in the past fifteen years. It was found that the hockey stick graph's creators used questionable interpolation techniques to create the graph, especially during the medieval warm period.
Digging a little deeper, plenty of other examples exist. The last full IPCC report concluded with a range of temperature rise over the next century, based on economic growth. Their high-end prediction assumed that third-world nations will grow at an extreme rate with no implementation of more carbon-efficient technologies. For example, the high-end prediction that North Korea in 2100 will have the same per capita GDP as the United States. Furthermore, most of the models out there assume a greenhouse emissions growth rate of one percent per year, instead of the actual half percent being observed today.
I will also say that oil companies gain little marginal utility out of funding global warming skeptics. If Europe's implementation of Kyoto's limits are any indication, global warming legislation has little chance to lower gasoline consumption in the short term. Considering discount rates and the premium on any scientist to work for an oil company, investments in research don't make any sense for the oil companies.
Posted by: Matthew at Apr 25, 2007 12:18:57 AM
@Matt:
As soon as there is evidence that hurricane risk will decrease insurance companies will need to put it into their models. Otherwise they will be priced out of the market.
The thing is that (with global warming going on) in the meantime the insecurity about whether hurricane risk will increase, decrease or stay the same will lead to rising rates, since the insurance company cannot accept additional risk (even if it is only the risk of risk) without being paid for it. Same effect as option prices rise when volatility increases.
I would never claim that mankind for sure will be worse off with a warmer world. As many here pointed out the forecasting of the actual weather is much too difficult. However, it is clear to me that the risk of being worse off increases with the speed and extent of temperature change. And I have a gut feeling that the risk/reward distribution regarding a rapidly warming world is tilted towards the risk-side (since we have seen a lot of times in history that rapid changes to an ecosystem lead to negative effects for men - at least in the mid-term).
Posted by: Amazed at Apr 25, 2007 8:44:16 AM
"Now, what's the alternative? As I can see it there is only one. That is to say that we don't want a better answer (though a better model), and to say that we will take whatever climate we get."
Clearly a failure of imagination. Why not create better models? I don't mean models that are designed to specifically disprove anthropogenisis. But surely a model that can not just show that CO2 is the cause but by how much, is useful. Wouldn't you want to know how much we have to curtail emissions? Wouldn't you want to know where to target your efforts for the greatest result?
Posted by: AvnerUWS at Apr 25, 2007 8:51:37 AM
"The evidence is now overwhelming that the climate is warming and that increases in greenhouse gases caused by fossil fuel burning is the main factor."
While the first argument is true, the second, that CO2 is the cause, is, scientifically, decidedly not proven. We know the Earth is warming. We know that CO2 is increasing. We DO NOT have proof of causality, only a theory, and that comes originally from a model that doesn't take into account any changes in solar activity.
Should we focus all our energies on changes in the climate that will happen relatively slowly (by human measures) and have always happened in our existence, and for which we are equipped to adapt?
Shouldn't more focus be made on identifying planet killing asteroids and developing a method to avoid them? Or is this a case like the perceived safety of driving versus flying, where we know one is more dangerous, but fear the other more?
Posted by: AvnerUWS at Apr 25, 2007 8:56:49 AM
"If only a reputable scientist would consider wasting his or her time on such horseshit when anyone with a pair of eyes and a working set of synapses understands that we're raping the environment."
Love the intricacy of this argument. Anyone who wants more rigorous proof because major changes are being asked for based on science that is considered politically unassailable is of course a BS'r. And anyone who holds such a belief is by definition stupid.
Sorry to burst your bubble, but questioning "conventional wisdom" is not a mark of deficient intellect.
Posted by: AvnerUWS at Apr 25, 2007 9:02:10 AM
"'Now, what's the alternative? As I can see it there is only one. That is to say that we don't want a better answer (though a better model), and to say that we will take whatever climate we get.'
Clearly a failure of imagination. Why not create better models? I don't mean models that are designed to specifically disprove anthropogenisis. But surely a model that can not just show that CO2 is the cause but by how much, is useful. Wouldn't you want to know how much we have to curtail emissions? Wouldn't you want to know where to target your efforts for the greatest result?"
Are you agreeing with me then, but phrasing it as disagreement?
Posted by: odograph at Apr 25, 2007 9:08:47 AM
Sorry, forgot to close italics. Just woke up.
Posted by: odograph at Apr 25, 2007 9:09:36 AM
"The Risk of Risk," are you fucking cereal?
You are a marketer's dream.
You are correct that eventually insures will have to put that into their models, but the publications are very one sided right now, which makes it very easy to conveniently ommit such factors in the time being. Before that happens, the growth in rates and the market have to flatten so that companies are forced to directly compete and undercut eachother for business. I don't know if the industry is highly competive right now, I am pretty certain that entry into the industry is far from easy. And, getting an account isn't worth a 10% reduction in revenue across your entire customer base (10% is not a real number, just a random guess).
Anyway, the Risk of Risk (which is almost as likely to mean that there will be less risk), is fantastically small (not significant, maybe not even observable). Other potential risk changes (noted above) swamp that potential factor. Note from the GAO report that they estimate that if the 1993 midwest floods happened today, the damage would be 5 times greater. That trend should put risk of risk from GW into perspective.
Truly Amazed,
aaron
Posted by: aaron at Apr 25, 2007 9:23:22 AM
"While the first argument is true, the second, that CO2 is the cause, is, scientifically, decidedly not proven. We know the Earth is warming. We know that CO2 is increasing. We DO NOT have proof of causality, only a theory, and that comes originally from a model that doesn't take into account any changes in solar activity."
It's not just CO2. It's also methane
and other greenhouse gases that human activity have put into the atmosphere at levels far exceeding their natural levels. The recent fourth assessment report of the IPCC
http://ipcc-wg1.ucar.edu/wg1/docs/WG1AR4_SPM_Approved_05Feb.pdf
says this:
"The understanding of anthropogenic warming and cooling influences on climate has improved since the Third Assessment Report, leading to very high confidence [>90%] that the globally averaged net effect of human activities since 1750 has been one of warming, with a radiative forcing of 1.6[+.06 to
+2.4] W m_2."
This is the consesus view of people who spend their professional lives studying the climate. These are people who understand the difference between correlation and causality. Their very high confidence is not based on a back of the envelope calculation. It's based on a huge amount of work across a large number of groups around the world work in which they compare the predictions of their climate models with what is actually happening in the world right now, as well as what happened in the past.
"Should we focus all our energies on changes in the climate that will happen relatively slowly (by human measures) and have always happened in our existence, and for which we are equipped to adapt?"
The changes are not slow. They're happening very fast - right now in fact. Civilization has enjoyed a very stable climate since the last ice age. It is decidedly
not the case "they have always
happened in our existance". There have been no climate changes in the past ten thousand years that come anywhere close to the changes that are predicted to occur over the next 100 years. Since civilization has never experienced changes as large in the climate as are predicted, it's not at all clear how well it will adapt. Just one example - rising sea levels - are likely to prove enormously costly, given the fraction of human cities that are on coasts.
"Shouldn't more focus be made on identifying planet killing asteroids and developing a method to avoid them? Or is this a case like the perceived safety of driving versus flying, where we know one is more dangerous, but fear the other more?"
Yes, it's just like that, except you have reversed the order. The probability of a huge asteroid hitting the earth in the next 10,00 years is extremely small; the probability that we make the climate much less favorable to
our species and the other species with whom we share the planet in the next 100 years is unfortunately quite high.
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Posted by: 謝文豪 at Apr 2, 2008 2:33:43 AM
