Says the FT (Oct 27, 2014 : The Bank of England has written to insurance companies to assess the risk climate change poses to their solvency and earnings. FT environment correspondent Pilita Clark and City editor Jonathan Guthrie discuss the move and regulators’ concern about global warming). Alas its a video, but worth listening to. Apparently there's a letter from the BoE to various insurance companies, but its moderately stealthed - not on the BoE website says the video, and my attempts to search for it.
Summary: they've written to 30 insurers, asking them how prepared they are for Climate Change. Is it just a friendly little letter seeking to "deepen a shared understanding"? Some Qs are pro-forma, some (about 15) rather more detailed: have you considered the threshold of potentially serious extreme weather events that would start to impact the viability and solvency of your business? And then at the end "what do you consider the role of regulation"? Does this mean, do they want insurers to have to put up more capital? Not something they are looking at "at the moment" they say. Then a brief segment in which the interviewer probes the connection between GW and extreme weather. And what part of catastrophes need to be covered by The State preventing them in the first place, and what by insurers paying for cleanup?
I'm no great fan of regulation. Ensuring that your insurers remain solvent is plausibly part of the regulators job, though.
Refs
* BoE demands climate answers from insurers
* Bank of England asks if insurance business climate-proof - the Tree
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>"Ensuring that your insurers remain solvent is plausibly part of the regulators job, though."
plausibly???
What part of
"The authority [Prudential Regulation Authority], which is responsible for the safety and soundness of 1,700 financial firms"
didn't you understand?
[You're talking about the job of this particular regulator as specified by the law of this particular country at the moment.
I'm talking about the general concept of what a regulator should do -W]
I am quite, quite sure that each and every natural monopoly needs strict regulation.
I am quite, quite sure that food and drugs need strict regulation to avoid adulteration.
Need I go on? Or will just reading Sinclair Lewis due to remedy your former lack of education?
I was about to comment that one would think that insurers and their reinsurance partners would understand the issues quite well given that they already deal with catastrophes, and carry out a lot of disaster-related research. Then I read this rather un-Daily Mail-like Daily Mail story:
http://www.dailymail.co.uk/wires/reuters/article-2812285/Hedge-funds-mu…
[Nice article. I'm not sure how re-insurance works, when you need to factor in the chance of your partner going backrupt, or otherwise vanishing, after 10-30-50 years.Doubtless its all in there, somewhere -W]
>[I'm talking about the general concept of what a regulator should do -W]
Even if you are talking of general concept, you think it plausible that the regulator shouldn't get involved regarding solvency of insurers? What then stops unethical people setting up insurance company with no assets and going bust if they have a period of above average claims. Maybe you just stop them setting up again but that isn't much help for the unpaid victims. Maybe it is there own fault for not researching/ understanding insurance company accounts? I am glad you have the time available to do this before buying any insurance.
Following 1906 Earthquake, "Twenty companies went bankrupt, and most excluded shake damage claims.[47]"
Lloyd's of London made its reputation and there was quite a shake up of insurance industry. Come on, you may as well admit it, with the insurance industry, the regulators job certainly does include ensuring solvency. It is long since decided not just 'plausible'.
[This is back to the same old argument. Expecting to win it with a knock-down blow from the 1906 earthquake is unrealistic. The argument is "to what extent should companies (like insurers) be allowed to fail when they fail, thus forcing people to exercise discretion when (insuring), and to what extent should the state do this for them?" I don't really want to have the argument all over again; we're not going to agree, and are very unlikely to say anything new. Though if you do have anything new to say, please do -W]
So you are perfectly happy with the inefficiency of every potential policyholder having to do all the work of assessing the adequacy of reserves every time a policy is acquired. That is the same work being done by millions of people each year who aren't experts rather than one single expert regulator doing it on a regular basis. You are also quite happy you wouldn't have fallen for the quake shake damage exclusions being adequate protection for the US insurance companies and you would have insisted on a policy backed by Lloyd's of London? You may well be intelligent enough but the majority of people and the time involved?
OK nothing new, unless you missed the hint of required expertise re shake damage exclusion not actually excluding fires caused by shakes.) Nevertheless I am still inclined to express my surprise that you attempt to defend such a position.
I assume re-insurance is mainly about sharing risk.
I would not want to insure my house with an insurer that was not underwritten by a re-insurer.
I assume that if my insurance company fails, the policy is written by the reinsurer.
The re-insurer is big enough to do the research to calculate the underwriting price.
If that's about right then the only "regulation" required for insurance companies need be that they are underwritten by a sufficiently large re-insurer, or that non-reinsured insurance companies make it jolly clear that they are not underwritten.
A consumer isn't going to have a hope in hell of exercising discretion about a reinsurer, and given the impact of a reinsurer going bust consumers (if not shareholders) would expect to be protected.
>[Nice article. I'm not sure how re-insurance works, when you need to factor in the chance of your partner going backrupt, or otherwise vanishing, after 10-30-50 years.Doubtless its all in there, somewhere -W]
This suggests you don't know much about charges on assets and their high placement in the orders of claims.
Reinsurance is about diluting systemic risk. An insurance company in a city is going to be a risky situation - one event can cause multiple claims. Swap it about so reinsurer has 1% risk in each of 100 cities and the risk is much more random and less systemic and you don't need as much in the way of assets compared to amount insured.
People do need to understand how re-insurance works.
In particular, at least some companies have interest in climate change. A good place to start is
Munich Re.
The problem for insurance companies in general is that the are paid to asses and price risk, and events like auto accidents and house fires have rather different and more statistical properties than "how often will a big hurricane cause massive damage around NYC?"
They are also not fond of non-stationary probability distributions, especially when the projections have wide confidence intervals.
> They are also not fond of non-stationary probability
I wonder if they can factor in "we're so big in the world market that the longer we deny this is happening, that will affect how many people will believe it's happening and plan for it, so the worse the damage is going to be"
olks like Munich Re or Swiss Re are not denying it's happening. Others might.
This is the key point, I think. With most insurable risks, enlarging the risk pool makes the payout rate more predictable, because the individual events are (generally) not correlated. An event like the earthquake of 1906 throws a spanner in the works, because suddenly you've got a lot of events (such as fires) which are correlated, and that blows a hole in your risk model. But still, if you enlarge the risk pool to cover many cities, you can still control that to some extent. Climate change, being a global phenomenon, threatens to blow the whole concept out of the water, unless you can find a way to extend your risk pool to include a bunch of other planets.
The first rule in insurance: There is no such thing as a bad risk, only a bad rate.
If an insurance company has a reasonably good model then it can make money at the appropriate disaster level. Part of the model would include spreading the risk to the point that no one event bankrupts the company.
In Florida, companies like Allstate and State Farm wanted to raise rates on coastal property.
People didn't want that, so FL said no. They quot insuring real estate.
FL set up a state insurance pool, to spread the risk across the state ... but I've been told that it was actuarily unsound ... and that the real expectation was that they;'d expect to get bailed out by the Federal government...
See Bloomberg article for some of the issues in general and this article more specific to Florida.
[Yup. There's definitely a problem with the State getting in the way of the market and effectively subsidising beach front property owning -W]
So Mark Carney (guv'nor of the BoE) was also quite explicit about the external costs of fossil fuels meaning we need to leave them where they are because we can't affford them, as well.
http://www.energylivenews.com/2014/10/15/mark-carney-reckons-most-fossi…
The Rockefellers and the governor of the Bank of England, when asked about the viability of fossil fuels, take their index fingers and draw them slowly across their throats.
[It am all de news, it seems. However, assuming the Graun is correct (http://www.theguardian.com/environment/2014/oct/13/mark-carney-fossil-f…) your gloss isn't quite correct. They quote him as saying "According to reports, Carney told a World Bank seminar on integrated reporting on Friday that the “vast majority of reserves are unburnable” if global temperature rises are to be limited to below 2C." I would regard that as nothing more than the bleedin' obvious, though it is interesting that he chooses to say it. I don't however see him saying that we can't afford the external costs. He's saying that *if* we want to limit T rises to 2 oC *then* we can't burn all the reserves -W]
The secondary underwriter market is better than regulators. What they need to avoid is the political pitfall of giving iinsurers an "out" by saying the things that interest groups want to hear. Overly pessimistic views such that they begin writing climate change artifacts out of policies will not be a good thing. For example, record flooding that occurs as a result of natural weather and glacial land changes in elevation should be covered if natural floods are covered. They shouldn't be able to exclude or charge extra for this.
BTW, a lot of "bubble" exposure to suppliers is dependant on how much of their product is sold as futures and whether any regulation would be on "use" or "extraction". If BP is selling a product at a contracted price for delivery 1 year from now, it's not clear (to me anyway) who would be stuck with regulatory restrictions. Airlines and utilities, for example, try to limit their exposure to the spot market by buying futures. It stabilizes their cost and it stabilizes product demand for oil companies. The investors that speculate on spot vs. futures are the ones that are at risk short term.
WMC said: [Yup. There's definitely a problem with the State [of Florida] getting in the way of the market and effectively subsidising beach front property owning -W]
When you put it that way, and if the State really expects the Federal government to bale them out, then it sounds bad.
If there is a need to build housing to alleviate other risks (of not enough houses) then might a state need to take a different view of risk (of, say, allowing building of needed houses on a flood plain before flood defences provision is in place) from the view an insurance company might take?
Relevant Met Office plug:
http://www.metoffice.gov.uk/services/industry/insurance