AOM4 - Insurance

In part of of The Ascent of Money, it is discussed the effect Hurricane Katrina had on the insurance industry in New Orleans. And while I know that the damage there was caused primarily by issues with the levies meant to protect the city, the natural disaster aspect made me think about a related issue that is very pressing right now, climate change. Specifically, seeing how the insurance industry reacted to this natural event made me think of a concept we recently learned about in economics, predictive markets. In economics we looked at how markets can sometimes be some of the best predictors of things that are typically very difficult to predict. An example we received was how the yields of grape crops are very temperature sensitive, so weather has a strong effect on their market. We looked at a case study where researchers realized that if they wanted to predict seasonal temperatures in California, watching trends in the stocks of California grape companies was actually a more consistent predictor than what most meteorologists could produce. Essentially, the market has built in to it knowledge, and a desire to use that knowledge as profitably as possible, so although there is a lot of noise that keeps markets from being perfect predictors of these sorts of things, when analyzed properly they can give very powerful models. With this in mind, I wonder to what extent insurance markets can serve as a predictor for global warming. They are, after all, directly affected by the amount of risk caused by natural disaster. I looked into it and found that this is in fact already happening. Especially in the case or reinsurers, or companies that sell insurance to other insurance companies, they have over time seen massive increases in the amount of natural-disaster-based insurance claims. They go so far as to say that at the current rate of growth, it is unsustainable. Katrina can be seen as a microcosm of this, these events that completely overwhelm insurance markets will only become more common. In the article, the insurance company discusses how it is becoming necessary for insurance companies to use their assets to fight climate change simply because its destroying their industry. A few examples they give are giving insurance discounts to sustainable building projects or lobbying climate regulation. Its interesting to me to see how, while there is a lot of debate about the nature of climate change and its risks, looking at the operations of the industry that actually deals with risk paints a very clear picture of how impactful it is and will continue to be.

Source

Grossman, David. "Global Warming is Already Costing the Insurance Industry Historic Amounts." Popular Mechanics, Hearst Magazine Media. 17 April, 2019. https://www.popularmechanics.com/science/environment/a27180829/global-warming-is-already-costing-the-insurance-industry-historic-amounts/

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