Sam Friedman on Climate Disclosure

It’s a little crazy at the day job, so I’d expect my posting to continue to be somewhat erratic until a couple of projects quiet down a little.

However, I did want to pop up to mention that Sam Friedman has an interesting article up, written by Charles Chamness, discussing the campaign to get insurers to disclose climate change risk as part of public disclosure.  One section of the article strikes a chord with me:

Earlier this year, the task force released a draft Climate Risk Disclosure Proposal that would require all U.S.-domiciled insurers to answer a lengthy set of “climate risk disclosure” interrogatories–drafted largely by Ceres–to be included in the Annual Financial Statement. The following questions are typical:

• “What actions have you taken to assess the impact of climate risk and global warming on your operations?
    
• What are the results of your assessments of the impact of climate risk and global warming?”

Robert Detlefsen, Ph.D, vice president of public policy for the National Association of Mutual Insurance Companies, said “these highly tendentious questions assume insurers have knowledge of things that are, in fact, unknowable.”

“While many property-casualty insurers face challenges and uncertainties due to the risk posed by large-scale natural disasters, no company is in a position to assess the risk posed by climate change per se,” he added. “Given the current state of climate science, insurers can do no more than speculate about the nature and extent of risks attributable to climate change.”

Amen!

Insurance is risky business, and there are a few of us who spend a lot of time on the job of trying to answer questions like, “what’s the worst that can happen?”   It’s a rather stimulating if macabre sport…and you quickly begin to realize that there’s a heckuvalot we don’t know.  

Sure we can model scenarios and assign probabilities, but such exercise introduces the risk that the models could be wrong or the probabilities could be off.  Also, questions like “what’s the worst that can happen” generally are answered by “the worst thing that can happen is all of these horrible individual events occur at the same time”, which opens up a door to a discussion about correlation and the multiplication of really tiny odds on multiple events….and you quickly begin to appreciate that a nontrivial part of pricing or modeling work really is art.

Yes, it’s important to consider what could happen if the climate changed, or if a Katrina-like storm hit metro New York, or both.  We can lobby for preventive action to be taken now, and we can monitor our exposure in to such risks to keep the risk of ruin minimized.  Those are good things, if done early enough.

But one thing that critics of the insurance industry don’t often appreciate is the bureaucracy we live with when dealing with state regulators.  Considering the amount of research and silly-form-filling-out carriers already have to do at the behest of 50 state insurance regulatory bodies…I’m not sure that singling out climate change risk for special treatment is the right approach to take.

Of course, I suppose I could naively hope that if the industry is more communicative about the risks it faces, states which limit insurer profit loads might finally allow the returns that investors demand.