A major long-term trend that planners should care about is adaptation to climate change. There are some examples of plans being made, but as with any climate change-related topic, US planners and politicians are slow on the uptake. Adaptation could mean changing how we build storm sewers to handle more frequent extreme rainfall, or it could mean something as drastic as abandoning large areas of coastline. Fast Company asks whether insurance companies (and the premiums they set) might just do that for us.
The prospect of billions upon billions of dollars in physical and economic damages from a single storm is enough to make one wonder whether we should stop building on the coasts altogether.
That’s the scenario hedge fund manager and catastrophe bond pioneer John Seo had in mind when he predicted in the current issue of Foreign Policy that “a decade and a half from now, a single hurricane or earthquake will come with a potential price tag of $1 trillion or more. Imagine a world in which economic damage equivalent to that caused by a major war or the detonation of a midsized nuclear weapon in a major city could materialize with a warning of only a few days.”
The numbers back him up. According to a 2008 study of the world’s largest port cities by the OECD, 40 million people are at risk of flooding, and total economic exposure is $3 trillion, about 5% of global GDP. By 2070 those numbers are expected to rise to 150 million people and $35 trillion, or 9% of GDP. Most of that growth will occur in Asia, where a major typhoon rolled through the Philippines and shut down Hong Kong’s financial markets this week before making landfall on China’s Hainan Island.
The prospect of a single storm practically bankrupting their industry has not been lost on insurers or their odds-makers. In June, Risk Management Solutions received permission from Florida regulators to update the risk models insurers use to set policy prices. The new models increased Florida’s potential hurricane losses by 6.5%, with damages in inland areas soaring as high as 90%. As Reuters dryly noted, “analysts say that the U.S. model changes could give insurers a strong incentive to raise prices.”
But raise them to what? Because not only is the potential for destruction increasing, but so are the frequency and intensity of storms as well. A study released earlier this month by Ceres, a consortium of public interest groups, found that by and large insurers believe in climate change–and believe it will increase their losses. Allstate CEO Thomas J. Wilson recently told analysts the company is saying goodbye to the “good old days” and is now “running our business as if this change [in extreme weather] is permanent.”
I wonder whether having insurance companies speak up about climate change will change the debate. I kind of doubt it. It might be better to think ahead about vulnerable areas and start planning ahead, but I can only imagine the backlash that would create. Of course, insurance companies slowing price people out is also a form of central planning, but one that doesn’t need to take into account equity or other public goods.