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Why the Insurance Industry Gets Climate Change

Insurance companies understand risk – which is why, unlike our myopic political class, they do not have their heads in the sand

When it comes to climate change, the US Congress is a hornets' nest of political dysfunction. Last month, President Barack Obama nominated energy executive John Bryson to lead the commerce department. From the response of congressional Republicans, you might have thought Obama had nominated Ed Abbey and Rachel Carson's imaginary love child.

Joplin. Mo., June 4 - Absolute Destruction [Image 4 of 5]

In 2009, Bryson had the audacity to support a cap-and-trade system to address climate change and, 40 years earlier, he helped launch the Natural Resource Defence Council. This spurred Darrell Issa (Republican, California) to deride him as a "green evangelist", while Senator John Barrasso (Republican, Wyoming) called Bryson an "environmental extremist" and Senator James Inhofe (Republican, Oklahoma) pegged him as "a founder of a radical environmental organisation".

Symptomatic of climate change deniers driving the Beltway discussion, the Washington Post recently relegated global warming to "second-tier issue" status. However, for one powerful sector of the economy – and one that's a hefty contributor to congressional campaigns – it's a first-tier issue: the insurance industry.

While climate zombies in Congress are lurching in lockstep toward environmental catastrophe, the insurance industry has been scrambling to act. It's well past time we listened to what they have to say. Insofar as the Republican party is the party of business, they might want to lend an ear as well.

Insurance companies have a vested interest in reducing the risks of climate change. Like scientists and the military, they're used to dealing with and planning for uncertainty. As scientists have made clear, climate change is cranking up the dial on extreme weather. Over the last 30 years, catastrophic economic losses have been rising (pdf) with the global temperature, which chops into insurance firms' profits. With landscapes and livelihoods being sucked into the extreme weather vortex, insurance firm executives – especially in Europe – are getting the message.

The insurance industry is all about risk assessment and capital accumulation. Katrina-like catastrophes lurk on the discernibly warmer horizon, giving insurance companies a real deal incentive to slice against the zeitgeist of denial. As Frank Nutter, president of the Reinsurance Association of America, told the select committee on energy independence and global warming in 2007, "The insurance industry's financial interest is inter-dependent with climate and weather."

Over the last five years, the insurance industry has become increasingly proactive on climate change, in terms of both underwriting and investment. Reinsurance companies – essentially firms that insure the insurers to manage and defray risk – have taken the lead. In September 2007, insurance firms formed ClimateWise in order to reduce economic risk associated with climate change.

That same year, Andrew Castaldi, head of the catastrophe risk unit for the Swiss Re America Corp, testified to the Senate's homeland security and governmental affairs committee, "We believe unequivocally that climate change presents an increasing risk to the world economy and social welfare."

In 2008, Ernst & Young – not known for having to peel bark from their sweater vests after intensive treehugging sessions – named climate change the number one risk to the insurance industry. In a 2009 report, Lloyd's of London warned of climate change contributing to "resource-driven conflicts; economic damage and risk to coastal cities and infrastructure; loss of territory and resultant border disputes; environmentally induced migration; government fragility; political radicalisation; tensions over energy supplies and pressures on international governance".

And this month, while US media fail to consistently connect the dots between weather patterns and climate change, Munich Re – the world's biggest reinsurer – stated plainly, "weather extremes such as the massive floods experienced by China since early June are due to the advance of climate change." While acknowledging factors like population growth and rising property values – especially in risk-prone areas – Munich Re wrote, "it would seem that the growing number of weather-related catastrophes can only be explained by climate change."

Unlike the "poisonous polluters and rightwing ideologues" Al Gore recently skewered in Rolling Stone, the insurance industry is perfectly willing to rely on the scientific consensus as put forth by the Intergovernmental Panel on Climate Change. Citing the IPCC, Munich Re noted, "The view that weather extremes are more frequent and intense due to global warming is in keeping with current scientific findings." Meanwhile, on the investment side, Munich Re is jacking up its investments in renewable energy assets and operations, while assigning SunPower Corp to develop a massive, 2.5 megawatt solar power system for its offices in New Jersey.

Let's be clear: insurance firms aren't altruists; they're capitalists. A rise in extreme weather means a fall in their profits. This is hardball economics based on risk analysis, not save-the-polar-bears stuff.

European reinsurers have taken the lead in this outburst of rational behaviour, with their counterparts in the US lagging in their wake. In Europe, insurance companies have pressured their governments to push policies that mitigate the human role in climate change, while in the US, insurance firms have tended to focus more on extreme weather events and how to adapt to them.

Quite logically, property insurance companies are taking the lead, with life and health insurance firms trailing behind. Reuters recently reported the spate of tornadoes in the US midwest will cost insurers more than $7bn, while the twister in Joplin, Missouri alone will spawn a $3bn bill. Insurance companies are perfectly willing to pass along premium hikes to consumers, but they're also up for concerted CO2 regulation that could eventually assuage the pocks on their profits.

Meanwhile, the political winds in the Washington have a strong whiff of petroleum. But the insurance industry is also a big-time lobby and donor to political campaigns. In the 2010 election cycle, oil and gas lobbyists spent more than $145m, while insurance industry lobbyists doled out more than $157m. Granted, much of the insurance money went to squelching meaningful heathcare reform, but the industry could throw its political weight around if it wanted to. Cash clogs the arteries of American democracy, but it can also help get things done. If nothing else, congressional climate cranks should take notice that a major industry treats climate change seriously.

The insurance industry can only take us so far. We need political leadership – and a vibrant, fully-mobilised social movement pushing that leadership – to make it the rest of the way. With climate change perilously approaching irreversibility, our time is running out.

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