Tuesday, November 3, 2009

Don't believe in global warming? Ask an insurance company

Skeptics of climate science believe first and foremost in the primacy of free markets over all other reason. Their fervency is so absolute that free market platitudes supersede any evidence, no matter how objective, to the effect that markets aren’t perfect. Thus, if there’s a problem that may need a government solution, skeptics are willing to disbelieve any evidence of that problem’s existence, latching on instead to any half-baked talking points that suggest things are fine. Convince yourself that all science is political, and it’s easy to dismiss out of hand all evidence contrary to your beliefs, shielding dogma from science.

So to convince skeptics, we'll have to try a different tactic. If we can’t ask a scientist, we’ll need to go straight to the source skeptics trust most: the Market (capital M). If the Market always has the answer, It (capital I) should be able to tell us whether global warming is real. And the best way to find out what the Market says about global warming is to ask the company that has the most to lose from it.

Munich Re is the largest reinsurance company in the world, with 2008 revenues of $46 billion. As a reinsurance company, Munich Re is in the business of insuring insurance companies. Yes, insurance companies buy insurance too: to protect themselves against the risk of a major disaster. It's simple: when a single house burns down here and there, it doesn’t threaten an insurance company’s solvency. But when a major catastrophe such as a hurricane strikes, that's a different story—with thousands of customers wiped out all at once, the company may not be able to handle the barrage of claims. Hence the need for reinsurance, and Munich Re sells more policies than anyone in the world.

So if looming environmental change were threatening to increase the incidence of such profit-destroying disasters, you’d think the company which stands to foot the bill would want to know something about it. And with an army of actuaries to assess those risks, you’d think it would be pretty well positioned to figure out those risks and do something about it.

And Munich Re is doing something, spearheading a massive $400 billion initiative to transform the Sahara desert into a solar power plant for Europe. Funded by a consortium of companies, it’s called the Desertec initiative, and it aims to scatter dozens of concentrated solar power plants throughout the desert, transporting the power across the Mediterranean to Europe via high-capacity cables. Munich Re is hoping this technological marvel will help to avert climate catastrophe and rescue its profits:

[Peter Höppe, Munich Re's head of climate change] said Munich Re had been concerned about the potential impact of climate change on the insurance business since the early 1970s. Extreme weather events related to climate change are already a reality and have the potential to be uninsurable against within a few decades, pointing to a possible crisis for the industry, he said.

"To keep our business model alive in 30 or 40 years we have to ensure things are still insurable," he said.

Munich Re also plans to invest in the new initiative and Höppe said banks were confident that they could raise sufficient funding to make the project work.

Concerned about climate change since the early 1970s? That wasn’t Al Gore or a university research scientist speaking—that was an executive at one of the largest risk management companies in the world. And it’s not just PR greenwashing—Munich Re is investing its own capital in a project, outside of its core business, of almost unimaginable scale. This isn’t even like certain American utilities supporting cap-and-trade in order to put less efficient rivals at a disadvantage. Rather, it’s a company whose business it is to predict natural disasters doing what it takes to prevent more of them from happening.

Put another way, this is not a case of a company trying to convince the public to buy its climate-friendly products (e.g. solar panels, wind turbines, etc.) - it's a company aiming to stop climate change and its damaging effects. A solar panel maker can create a market for its products by hyping global warming; at the end of the day, what matters is not global warming's reality, but customers' belief in that reality. Munich Re, on the other hand, couldn't care less what anyone believes - all it cares about is what nature will do to the properties insured by its clients. If global warming turns out to be false, spending time and capital abating it through Desertec would be a waste. In other words, Munich Re has a vested interest in climate change science being wrong, but it has nonetheless concluded that the science is right, and that spending billions of dollars abating global warming is a wise investment. This is about an unbiased assessment as it gets.

So when the world’s largest reinsurance company, the firm with the most money riding on its ability to predict disasters, acknowledges the reality and seriousness of global warming, it puts the skeptic in quite a pickle. If markets are always right, then shouldn’t we trust Munich Re about global warming? Because teabaggers have a certain word for people who don’t trust free market firms to make the right decisions. And it starts with S.


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