Sunday, September 04, 2011

When business knows what politicians don't...

Been traveling, back from Asia and a lot to write blog about alternative transportation. A little to jet lagged to write originally, but here is an interesting look at reinsurance, risk and climate change. Enjoy

Bloomberg has an interesting editorial on how the Insurance industry is looking at climate change and how it differs from pro-business politicians views. The insurance industry has to be brutally honest at the way it looks at data, there are no politics in loss. In short it's betting on climate change happening.

Hurricane Irene’s residue is likely to include a confusing debate over whether insurers or property owners are responsible for storm-caused water damage. There’s no lack of clarity, however, over whether the insurance industry believes in climate change and its ties to lethal weather: It does.

The editorial points to a cover story article in Bloomberg Businessweek which has the following:

To that end, Swiss Re has started speaking about climate risk, not climate change. That the climate is changing has been established in the eyes of the industry. “For a long time,” says Bresch, “people thought we only needed to do detailed modeling to truly understand in a specific region how the climate will change. … You can do that forever.” In many places, he says, climate change is only part of the story. The other part is economic development. In other words, we’re building in the wrong places in the wrong way, so wrong that what we build often isn’t even insurable. In an interview published by Swiss Re, Wolf Dombrowsky, of the Disaster Research Center at Kiel University in Germany, points out that it’s wrong to say that a natural disaster destroyed something; the destruction was not nature’s fault but our own.

There is a solid discipline in gambling, you play the odds and in most cases you shouldn't gamble (outside of entertainment value). The house knows this, but most players don't. This plays out in the general public as well.

Reinsurers, however, have no incentive to mislead. Their choices on risk, with billions of dollars at stake, are necessarily aligned with the pursuit of truth. If a reinsurer is more scared of a risk than it should be, its shareholders will punish it. If it is less scared than it should be, the world, eventually, will break it. There are rewards for politicians, corporations, think tanks, and activists who dissemble about risk. There are none for reinsurers. If they’re taking on less of it than their insurers would like them to, then the world is more dangerous than we’re willing to admit. What a reinsurer will underwrite, then, offers a marker, one edge of what Bresch calls the gap between modeled and perceived reality.

We are players in the casino, and the house is mother nature. But while we can't completely change the odds, we can shift them to our favor (card counting, etc) and we can price the returns (going to different casinos with different payouts). Most of our politicians are placing sucker bets by denying any possibility of climate change. A lot has been said about "tail events" such as "Black Swans", but what if you assume black swans aren't that rare? Cultures do live that way:

Catastrophes do not surprise all societies equally. Greg Bankoff, an historian at the University of Hull in Britain, has defined for the Philippines a “culture of risk,” a set of adaptations built around the constant threat of natural disaster. Agricultural systems in the Philippines focus on minimizing loss rather than maximizing yield. The islands developed a kind of low, buttressed “earthquake baroque” style for stone buildings. Communities are quick to relocate out of danger.

As a culture, Americans are about maximization of return, not minimization of loss. We see this in our habits, our loan behavior (housing bubble anyone. Pricing climate change into our actions and policies is not a definite outcome, but it does make for a good insurance policy for our future.


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