Event Attribution

You run a large insurance company with a massive property damage operation. You cover natural disasters in addition to the run-of-the-mill kinds of lesser issues from car wrecks to bursting pipes. You’ve noticed an uptick in mega-claims, worldwide, ranging from tsunami damage to a Japanese nuclear power station to massive storm surge devastation along the eastern seaboard.

Your job is to assess the risk your company is likely to face and set insurance rates that are both competitive yet sufficient to cover the new kinds of risk you are likely to face. You also need to analyze how much risk pooling and re-insurance you need to keep your company alive should the worst expectations actually take place.

Despite years of being told by members of your local community that there is no such thing as global climate change and that there may in fact be religious intervention to reverse current trends, your statistics have been telling you a different story for quite a few years now. Do your past numbers provide enough substance for you to rely on them, and if not, what kinds of trend analysis figures and projections can you really trust?

What do you do? Even with the smartest mathematicians and actuaries, you aren’t really certain how to plan. “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.” New York Times, August 26^th. The process is on-going, inputting new climate details and new disasters on a constant and never-ending analysis.

Factors such as topography now become relevant as well. “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…

“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… 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.” NY Times.

The ramifications extend well beyond the insurance industry itself. Where insurers go under from the strain of overwhelming claims, the burden on government increases exponentially.  Where rates in high-risk zones are not subsidized by the government, they skyrocket or insurance simply isn’t available: “The National Flood Insurance Program was enacted in 1968 to control soaring federal payouts for natural disasters. Communities that participated agreed to regulate development; in return, residents living in flood-prone areas qualified for insurance underwritten and subsidized by the federal government. Nearly 22,000 communities have joined the program, and the government now backs about 5.6 million policies. Twenty percent of the holders of those policies pay subsidized premiums that are significantly below risk-based rates.

“The program was supposed to be the first line of defense against runaway construction in flood zones. Over the past 45 years, it has succeeded in limiting some but not all development in at-risk areas, and disaster losses have ballooned. Following the great Midwestern floods of 1993, what is now the Government Accountability Office predicted that the program would need to borrow up to $1 billion to cover losses; two decades later, a succession of major floods and storms, culminating with Hurricane Sandy last October, have pushed the debt to roughly $25 billion. It hasn’t helped that the program was unsound from the start, laden by Congress with overgenerous subsidies and almost comical provisions that allowed, for example, insurance payouts for structures that flooded up to 16 times.” New York Times, August 29^th.

The viability of living in such areas becomes particularly expensive, if not impossible, to justify. In areas of clear vulnerability or repeated and sequential disasters, allowing rebuilding in such venues perhaps becomes a luxury that society can no longer subsidize. Change in the way we look at our world is absolutely necessary. We ignored and continue to ignore climate change issues, and now it’s time to pay the piper.

I’m Peter Dekom, and the same-old/same-old just isn’t anymore.