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Climate Change and Reinsurance, Part I

Many scientists, policy makers and activists are quick to point out when industry misuses science or has a conflict of interest when making scientific claims. And right they should. Examples are familiar --smoking, drug approval tests, Erin Brockovich, the fossil fuel industryand climate change and so on. Even though conflicts in interest abound, Iam sure that the vast majority of folks in industry don't misuse science. But because industry can bring so many resources to promote its interests, its advocacy efforts can have a disproportionate impact.

However much to my surprise, not only does the reinsurance industry get what amounts to a free pass from scientists and advocates when they make claims about climate change and disasters, but the United Nations, home to the venerable IPCC, and advocacy groups often partner with reinsurance experts to advance their agenda. Not only does this not make sense for intellectual reasons, as the UN's IPCC is supposed to be the authority of climate science (why do they need reinsurance industry backup?) but also for pragmatic reasons. Doesn't the UN realize that if it partners with a conflicted reinsurance industry, whether or not its claims are correct, itsets the stage for people (like me in this post) to point out this uncomfortable fact? Before evaluating the substance of claims made by reinsurance companies about climate change and disasters, let's first ask if reinsurance has ac onflict in interest when making claims of increasing disasters related to climate change.

The reinsurance industry makes money, by and large, through income that it earns on its investments, and not through the differences between what it collects in premiums and pays out for disasters. But its premiums are important from the standpoint of not just being able to pay out when disasters strike, but crucially for creating a reserve of funds that can be invested and thus generate income for shareholders. The greater the reserve, then the greater the potential income. It seems like pointing out the obvious that the reinsurance industry has a powerful vested interest in charging the highest rates that the market will bear for its products. And the prospect of more disasters means a basis for charging higher rates. Thus, for the moment setting aside whether or not recent disasters are caused by climate change, it seems pretty clear that when the reinsurance industry say that disasters will get worse in the future, they have a clear conflict in interest. The following statements would appear to bear this out:

Consider the following Bloomberg news story from earlier this week:

"Munich Re, the world's largest reinsurer, expects damage from natural disasters to rise ``exponentially'' in the coming years, triggered by human-driven climate changes such as global warming. We're seeing, and this is also shown by the models, that climatic changes will speed up, and that damages will probably not rise just linearly but exponentially,''Peter Hoeppe, Munich Re's head of Geo Risks Research, said in an interview. Weather-related disasters will probably occur with greater frequency and intensity, prompting customers to boost insurance coverage,he said."

And consider this statement from a Deustche Welle article from last October:

"As a business, then, Munich Re says it has to take the current trend of global warming into account. One way to do this is to passing some of the risk on to the customer. "Premiums will have to be increased relatively,"[Munich Re's] Gehard Berz said. "And we have to let our customers know that we, as reinsurer, also have to take more big catastrophes into account, and thus need greater cash reserves. That is our main problem.""

When the reinsurance industry makes claims of increasing disasters, from the perspective of conflict of interest, this is no different than a fossil fuel interest promoting that science that best supports their interests. And it is important to point out that as interests, there is nothing wrong with industry or anyone else promoting its perspective as best it can. There are of course plenty of folks out there watching carefully induustry's scientific claims.

The situation becomes problematic when the supposed honest broker, the United Nations, partners with an industry that has a clear conflict of interest. So to the uniformed outsider a perception may be created of symmetry - oil and gas has its biases and matches up with corresponding political interests, and on the other side, the reinsurance industry has its biases and it also matches up with corresponding political interests. This symmetry lends itself to the view among some that climate change is all about competing political interests, and not much about science.

Because of the reinsurance industry's obvious conflict of interest on climate change, the UN and its IPCC should eschew partnering with it to promote science or politics (or both simultaneously), regardless of the truth or falsity of the claims being made by the reinsurance industry. If the UN IPCC wants to serve as an honest broker then it need to either partner inclusively with diverse set of stakeholders with conflicting interests or simply avoid partnering only with those selected industries that happen to share its biases. And the community of scientists and advocates who are quick to criticize the oil and gas industry (and rightlyso) when it has a conflict of interest or misuses science, should think carefully about giving a free pass to those industries whose conflict of interest happen to be more convenient.

All of this is more significant because the claims about disasters being made by some in the reinsurance industry, and promoted by the UN and others, are simply wrong. Stay tuned for Part II.