Are We Being Set Up? Your Insurer May Be Playing You For a Sucker.

 

Munich Re, Swiss Re, Hanover Ruck - these outfits know a thing or two about risks and usually give you the straight goods. They're the giants that retail insurers rely upon to offload some of their policy obligations.

The problem is that you don't get to deal with the reinsurers.  You have to deal with the retail-grade outfits to insure your house, your life, your car, even your holiday abroad. And they're not in the business of telling you the truth.

At one time we imagined that the insurance industry would be our climate heroes. Turns out they had other ideas.

The retail side of the industry continued to provide coverage for home and businesses at risk from climate-related fires and wind storms. Indeed, since the climate risks surfaced, millions of people have moved into wildfire zones in the US west and to coastal properties at risk of hurricanes, storm surges and sea level rise. That influx of people continues, even though the Florida coast has eight of the 20 cities in the US most threatened by sea level rise.

Insurers continued to ignore the threat of climate change in part because the incentives at the retail end are to continue to write policies right up until catastrophe strikes and because the reinsurance end has shown extraordinary ingenuity in limiting, spreading and offloading risks. For one thing, most policies have to be renewed every year, which gives insurers the option to either raise prices or pull out of an area entirely should disaster strike. For another, after Hurricane Andrew in August 1992, insurers offloaded some of the risks through the innovation of so-called catastrophe bonds, which offer outside investors high rates insuring a specific risk for a specified period of time.

The ultra-wealthy can self-insure, but most middle-class homeowners or homebuyers cannot get a mortgage in a zone vulnerable to wildfires or other natural disasters without insurance protection. And if private insurers raise rates or pull out, do taxpayers want to assume responsibility for trillions of dollars of damages from climate risks to protect people who choose to live in harm’s way? The mispricing of climate risk has set the stage for a property and banking crisis that could dwarf what happened in 2008 and, unlike that meltdown, the weather extremes that caused the crash would only intensify in subsequent years.