on August 28, 2013 by admin in Insurance Industry, Comments (0)

Mutually Insured Destruction

The seemingly inexorable (and increasingly irreversible) march of planetary warming is something we tend to associate with increased devastation — floods and famine, droughts and storms. In many cases, that’s true. But there’s a reason scientists prefer the term “climate change” to “global warming” — not everything is getting warmer. As the global average temperature rises, it alters weather systems, changing patterns of heat and cold and shifting wind currents. Risk is redistributed along with them.

No one understands risk better than the insurance industry — except, perhaps, the reinsurance industry, the companies that sell insurance to insurers, which also need protection from risk exposure. As the risk managers for the risk managers, reinsurers follow climate change obsessively. A great deal of money is at stake. If the 1947 spring floods happened today, they could cost the insurance industry as much as $24 billion.

In June of this year, the Geneva Association, an insurance research group, released a report called “Warming of the Oceans and Implications for the (Re)insurance Industry.” It laid out evidence explaining how rising ocean temperatures are changing climate patterns and called for a “paradigm shift” in the way the insurance industry calculates risk. Traditionally, insurers have predicted the future by studying the past. If your house is on a 100-year flood plain, for example, that’s because an actuary looked at historical data and calculated that there’s a 1 percent chance of your neighborhood’s experiencing a flood of a certain magnitude every year. Over the course of 100 years, that massive flood is likely to happen about once.

But the past can no longer reliably predict the future. A 2011 paper in The Journal of Hydrology suggests that the risk of spring floods associated with snowmelt in Britain will decline. That same year, a paper published in the journal Nature indicated there may be a link between climate change and an increased risk of fall flooding in Britain.

To fully grasp how our changing climate affects their downside, the insurance and reinsurance industries need new ways of modeling risk — systems that look at what’s happening now rather than what happened decades ago. That drive is leading insurance wonks to join forces with climate scientists, who might have found a solution.

While the ever-practical insurance industry has long focused on the past, climate science has, for the most part, been fixated on the far future. Scientists built computer models of virtual worlds and used them to test hypotheses about what would happen to our children and grandchildren as the planet becomes hotter.

“But for most practical decisions,” says Myles Allen, a climatologist at Oxford University, “what the world will be like in 50 years’ time is less important than understanding what the world is like today.”

A new method of statistical analysis called “event attribution,” developed by Allen, allows climate scientists to better understand how weather patterns work today. It examines recent severe weather events, assessing how much of their probability can be attributed to climate change. These impacts are so complex that isolating them would be like taking the sugar out of a chocolate-chip cookie — nearly impossible, everything is so intertwined. Event attribution tries to break through this ambiguity using brute force.

Harnessing a tremendous amount of computing power, scientists create two virtual worlds: one where the atmosphere and climate look and operate like ours does today, and one that looks more like the preindustrial world, before we started releasing greenhouse gases from factories, cars and buildings. They alter the weather in both simulated environments and see whether natural disasters play out given differing sea-ice levels, greenhouse-gas concentrations and sea-surface temperatures. They do this over and over and over, tens of thousands of times, producing an estimate of how much our altered climate affected the outcome.

It’s a slow process that requires sophisticated software, which is why it’s a relatively recent development. It took Allen and his team six years and 50,000 simulations to analyze the causes behind an episode of fall flooding in Britain in 2000. Eventually, they were able to say this: 9 times out of 10, the world with climate change had a 20 percent greater chance of experiencing those floods than the world without.

That sort of less-than-satisfying answer is common with event attribution. In 2012, Allen and his team published a paper on the heat wave that baked huge swaths of Russia in the summer of 2010. Their conclusion: that climate change made only a modest contribution, but a warmer climate had made that sort of heat wave more likely to occur in general.

It doesn’t fit well on a protest placard, but this information may one day help build better actuarial tables, translating complicated data into real-world impacts. If reinsurers expect to spend more money on losses in your region, your insurance company’s insurance gets more expensive, and your policy should, too. But it doesn’t always work that way.

Florida is a case in point. There, where some 2.4 million people live less than four feet above the high-tide line and where many U.S.-bound hurricanes are likely to pass, insurers can only use historical models to calculate risk. Climate scientists estimate that sea levels will rise anywhere between 8 inches and 6.6 feet by 2100 — enough to inundate whole neighborhoods in Miami, even on the lower end. The past offers a comfortable fiction that could limit rate hikes by writing the risk off the books.

As more groups like the Geneva Association call for risk models that account for climate change, politicians are going to get a different message. Denying climate change isn’t just foolish — it’s bad for business.

Maggie Koerth-Baker is science editor at BoingBoing.net and author of “Before the Lights Go Out,” on the future of energy production and consumption.

Article source: http://www.nytimes.com/2013/09/01/magazine/mutually-insured-destruction.html

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