Floods, hurricanes and the cost of home insurance
AFTER Hurricane Sandy we’ve had the usual claims that climate change is going to make life more expensive for us all. We also get the same thing being said here in the UK whenever there’s a flood. The idea being that as climate change makes floods and hurricanes and tempests and cyclones and disasters and Aiiiieee!we’reallgonnadie! more likely then the expense of these things is going to continue to rise.
Rebuilding after them will become ever more expensive, house insurance, hurricane insurance, flood insurance, all will be come more expensive as a result of climate change. As all of those things have been getting more expensive in recent years and it’s all climate change’s fault.
The problem here isn’t that this couldn’t be true: it could be. It’s just that the evidence that’s used to support the thesis isn’t really all that strong. For there’s a confounding factor here as well.
Yes, most certainly, the various forms of insurance have been getting more expensive. Most especially in the last three or four years. But that, at least part of that, comes from the fact that interest rates have been so low. What most people don’t understand about insurance is that the companies themselves very rarely make money by providing insurance. They take in the premiums you and I pay, yup. They pay out on damages, yup, pay the staff that organise all of this, run the offices and so on: and usually to often make a loss doing so. The profit comes from having all those premiums for the time between collecting them and paying them out again. This vast stash of money (and it is vast) is invested and it’s the profits from the investments that make profits for the companies. And in a low interest environment these profits are smaller: so, Bank of England makes interest rates near zero and the price of insurance rises.
OK, all terribly geeky about how home insurance companies work. But there’s another thing to consider about the rising cost of natural disasters as well. We’re getting richer. Which means that over the decades we build larger houses, which have more things in them that get wrecked when disaster does fall. So it is true that hurricanes and floods are getting more expensive. And also that insurance is getting more expensive. But that’s because we’ve got more, and more expensive, stuff that gets damaged or insured.
Finally, in the UK, we’ve our own special brand of stupidity as well. The last lot, New Labour, specifically directed the building of houses on flood plains. Really not all that sensible when flood plains are, erm, where we know it floods from time to time.
Is it possible that climate change will make insurance and disasters more expensive in the future? Sure it is. But a goodly part of insurance and disasters becoming more expensive is nothing to do with climate change at all: it’s both because we’re richer and insuring more and because we’ve got low interest rates.
Photo: Cora Nelsen calls her insurance company near her damaged home in the Belle Harbor section of the Rockaway neighborhood of the borough of Queens, New York, Monday, Nov. 5, 2012, in the wake of Superstorm Sandy. Temperatures dipped toward freezing early Monday, and tens of thousands of people without power along the ravaged Atlantic coastline faced the prospect of finding somewhere else to stay. (AP Photo/Craig Ruttle)