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Thriving on Misfortune

When we think of global warming and climate change, often we envision large scale Hollywood slaughter, with waves, wind, and rain washing some people away, while drought slowly bakes others. Much like Peak Oil, however, it may be the economics that will get us before the physical effects of the disaster.

An MSNBC article about American insurance companies discusses their preparations for the upcoming hurricane season. As you might expect, rates are going up, in many cases drastically, with some individual types of coverage increasing between 100% and 400% compared to pre-Katrina prices. Many of the people most effected by these increasing rates live in places where the risk is highest, and where they are still trying to recover from last year’s disasters. For some, this may be the difference between getting by and not getting by. Those who gamble and go without insurance risk being wiped out by the next hurricane that skirts their hometown.

You’d be forgiven for assuming that the insurance companies are hurting. Surely their coffers are empty, cleaned out after paying out claims to all those poor people who had their homes destroyed in 2005.

Actually, the opposite is true — the insurance companies are flying high.

After a hurricane-ravaged year that was the worst in the industry’s history, insurers are thriving again. Several are raising premiums, cutting coverage and some may be ready to buy back their own stock or acquire other companies.

Since 9/11 and the string of strong hurricanes culminating (so far) with Katrina, the insurance market has been what’s known as a “hard market”; that is, one in which people have difficulty finding insurance. Supply and demand dictates that when many people want your product, you can charge more for it. The immediate losses for some insurers were large in 2005, but re-insurers (the parent companies that insure the insurance companies we know) were able to swallow the losses; but their rates will also increase, and this will be passed down to consumers.

Anyone who thinks about this for a while will realize that this situation cannot exist for very long. If each summer continues to be, on average, more disastrous than the last, eventually people will stop rebuilding and reinsuring. Each year, more people will have their homes destroyed, and with no insurance to help them rebuild, they’ll salvage what they can and move to a place where they don’t have to worry about being blown away every few years. Right now the mood is one of resolve and “not giving in.” After a few more years of storm battering, though, many might decide it is better to throw in the towel.

As weather patterns worsen, more and more places will in theory become uninhabitable. The Gulf of Mexico has one of the highest surface temperatures of any ocean water — which makes it the perfect breeding ground for hurricanes. Eventually, any coastal area located around that body of water may become too dangerous to live on, or too expensive to insure. Later, if global warming follows the predictions of many models, the melting of the ice caps will raise ocean levels and other places will become uninhabitable: much of the east coast of the United States and cities, including economically crucial and hugely populated areas such as Manhattan may find themselves underwater. Meanwhile, in the west, dry areas such as Las Vegas and Colorado may find themselves running dry, as the runoff water from seasonal ice caps on surrounding mountains stops flowing because the peaks no longer get cold enough to freeze in winter.

Of course in these situations, in the modern world, people won’t just curl up and die. They’ll leave. But the economic impact of having millions of people migrating from the no-go places into the remaining safe areas will be devastating to the economy of the US, and then by default to the rest of the world.

We haven’t reach these points yet — it might take years, or it might never happen if we’re lucky or manage to make changes in time. But the current rise in insurance rates is a concrete example of how climate change is already effecting our lives, and that it means more than just warmer winters and a few drowned polar bears. After all, it is global warming and global climate change. When insurance prices rise, they rise everywhere; in today’s open markets everything is connected. Nobody will be entirely protected.

Some of us will pay sooner, some of us will pay later, but eventually we will all pay one way or another.



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