Insurance and Climate Change

Can you believe all this rain?

FT.com

In comical fashion I received back to back contrasting social media posts about the insurance industry¹, recently.

First, a LinkedIn post recycled an April story in The Guardian in which Günther Thallinger, former CEO of Germany’s Allianz Investment Management and now on the board of Allianz, is reported as saying that climate change is making risks uninsurable and so,

That means no more mortgages, no new real estate development, no long-term investment, no financial stability. The financial sector as we know it ceases to function. And with it, capitalism as we know it ceases to be viable.

The next moment, in my X feed, Artemis, the ILS info site, announces,

Cat bond market expected return rises, 2025 could be third double-digit year in a row: Lane Financial

Capitalism is alive and well after all.

Featuring the graph at the top of this post showing investment returns of catastrophe bonds, the Financial Times reported that this lucrative trend is thanks to the ideas about climate change,

Insurers are selling so-called catastrophe bonds at a record rate as they seek to offload the growing risk from climate change on to investors eager for high returns.

But if you closely follow the climate change science literature, industry loss analyses, climate science assessment reports, and associated debate it is apparent that the “growing risk from climate change” is limited.

Anthropogenic influence on the climate system is real of course, and there are many good scientific debates on the details about extreme weather but the overall impact on losses is somewhere between undetectable and a shrug.

Thus, if the reporting at the FT is accurate then it is the idea of climate change that has proven profitable.

Another Financial Times article says money is pouring in from everywhere and competing with reinsurers. This miffs reinsurers and creates new uncertainties about the availability of capital down the road:

“In the traditional market, a big hurricane will not be a surprise,” [Munich Re Board Member] Golling said. By contrast, he added, “capital is getting involved that is not informed in the same way as an underwriting company”.
…
“We haven’t seen a 50-year or 100-year event that has exhausted the cat bond market,” Golling said. “It has to be seen whether the capital that backs up those cat bonds will reconsider their strategy after such an event.”

Even still, “exceptionally benign” cat losses since the LA wildfire losses has led to forecasts that the four major European reinsurers (Munich Re, Swiss Re, Hannover Re, and SCOR) could bring in a collective €2bn+ of surplus earnings.

Everyone likes money. So, no one is too keen to lower prices.

Here is Artemis again reporting on a Moody’s report on reinsurance,

“Although there are some signs of easing of terms and conditions in the reinsurance market, the majority of our survey participants said they expect attachment points for their excess of loss programs to remain stable in 2026,” the rating agency said.

“As a result, primary insurers will continue to largely retain nonpeak losses (high frequency, lower severity catastrophe losses) such as those stemming from convective storms, wildfires and floods. In recent years, these types of events have grown as a share of total annual catastrophe losses for the industry.”

And so, back at the FT…

several bosses of top carriers have reassured shareholders that they are “de-risking” their home insurance offerings by eliminating or severely cutting back coverage of properties that are at the highest risk of losses from severe weather.

This is despite things for primary insurers being on the up and up as shown below.

FT.com

The way I think about this (correct me if you disagree) is that “climate change” uncaps the conception of risk and makes it as dynamic as your favorite climate quant desires.

This enables:

• cat bond investors to demand more for their money while reducing the likelihood the bond will trigger;

• reinsurers to maintain higher pricing despite market competition; and

• insurers shrink cover to maintain profitability levels while meeting regulatory regulations and paying higher reinsurance costs

Some years ago when the market dynamics were similar, round about 2012 I suppose, I tried to explain to a reporter that risk is a social construct. The game including shaping public perspective and affect to foster acceptability of business practices. The reporter did not dig my social science lesson, but it remains fitting.

“Danger is real but risk is socially constructed,” as decision scientist Paul Slovic put it many years ago.

How people think and feel about risk also guides the risk assessment practice. Slovic elaborated on what this meant for politics,

Whoever controls the definition of risk controls the rational solution to the problem at hand…Defining risk is thus an exercise in power.

From this perspective the power is held by investors that see climate change as a major factor in weather risk. And there appears very little incentive from within to correct them. For instance, according to Artemis, Morningstar reports that the reinsurance industry is at overcapacity and its best bet at maintaining pricing and demand is the rising awareness about climate change. tee-hee.

No doubt, there is a big push in the advocacy sector to increase public risk perceptions of climate change through marketing extreme event attribution.

The incredible technocratic hustle going on at the upper echelons of wealth and advocacy is apparent in a recent blog post by an interesting trio:

1. a senior executive at Environmental Defense Fund,

2. a risk analyst consultant for a large asset management firm firmly committed to extreme visions of climate change, and

3. a former executive of Nephila, one of the world’s largest ILS manager

The three argued for a build out of parametric insurance and expansion of cat bonds because anthropogenic climate change was threatening insurability of weather risks. For all I know, the expansion of ILS promises grand gains in social good, but any complex technical system built on false pretense and bad science is inherently unstable because it is contingent on political sentiment.

I have yet to find a big taker on my view of this hustle.

• The typical folks you might think would jump on this like the consumer advocate groups are not too keen to run up against norms in climate change advocacy.

• Free market types who might otherwise recoil at the idea of political advocacy in finance are not willing to unpack risk management practices assuming that an invisible hand will correct anything questionable.

But ultimately those that can most credibly discuss in detail how this all works and to what extent it is, or is not, constraining the affordability of homeowners insurance have no incentive to do so. I mean, we all remember what happened to Stuart Kirk when he stepped out of line and said too much of the quiet part out loud on ESG.

The other challenge is that the loss potential of extreme weather events is in fact, really very large. For whatever hot potato games are played within the industry everyone could lose their shirt given a Miami hurricane or a series of unfortunate events: a hurricane here, an earthquake there, a flood caused supply chain disruption…

There is an escalation of the narrative around climate change as a threat to national economic stability via the insurance mechanism at the same time as there are real time national economic and political stability concerns.

France and Germany are struggling. European central banks are pursuing monetary policy rooted in a screwy climate paper in a scientific journal. The US is nursing a credibility crisis. Though blame may be spread around for all this, neither is it detached from the perverse political landscape beckoned by the climate change agenda.

I think the unwillingness of the insurance industry to get their marketing and PR departments to reflect sound analysis on the causes of loss will come back to haunt because the type of politics being enabled is destabilizing.

In my next post I will discuss how NGOs and investors have come together to market the current uninsurability narrative for energy and legal advocacy.

1. Unless I specifically note otherwise, the “insurance industry” here means: primary insurers, reinsurance, ILS