Climate Change Effects and Insurance — Berkshire Hathaway Should Be Worried

According to a report on Green Tech Media, shareholders of Berkshire Hathaway Insurance have voted to ignore climate risks. Apparently Mr. Buffett “doesn’t think climate change creates serious risks for Berkshire’s insurance business.” http://www.greentechmedia.com/articles/read/berkshire-hathaway-shareholders-vote-to-ignore-climate-risks

Hmm, let’s take a quick look at what’s happening right in Fort McMurray. A massive forest fire has burned through a significant portion of the town leaving tens of thousands homeless and forcing the one of the largest evacuations in Canada’s history. The fires are due to a milder than normal winter combined with less snowfall, fostering an extremely dry spring. In fact, the situation is so bad in northern Alberta and BC, that BC can’t even send its own firefighters to help combat the blaze because they’re worried about their own fire problems.

Most of these properties will be insured — how much is this going to cost the insurers? Recent estimates based on a similar fire which burned through Slave Lake, Alberta in 2011 cost insurers $780 million. Fort McMurray is about ten times the size of Slave Lake. Currently, the estimate is $2.4-4 billion in property damage, however, if the fire keeps raging (and there is no weather relief in sight until tomorrow), it is predicted that the insurance price tag could be as high as $9 billion. To put that in perspective, the Alberta floods in July 2013 cost insurers at least $1.7 billion with more than another $4 billion in uninsured losses — a price tag that now seems paltry by comparison.

Climate scientists predict drastically changing weather patterns in the coming years. Rain patterns will be shorter with more water being dumped at a time — which will lead to flooding due to the hardened ground. Winds will be stronger, droughts and extreme heat will be more common, and, of course, drier conditions will lead to a higher incidence of forest fires.

El Nino was particularly strong this year due to the ocean temperatures being 3C above normal, when in an average year, 0.5C temperature change is enough to produce an El Nino effect. It is likely that El Nino was responsible for the milder temperatures and less snowfall in Northern Alberta and BC this year. Scientists predict that the effects of climate change will be that it will make regular climate events, such as El Nino, more frequent, and possibly more severe, than it would be without additional greenhouse gas emissions, producing more dramatic, more serious weather events. [See this article on the link between climate change and El Nino for more information: http://phys.org/news/2016-02-el-nino-global-warmingwhat.html]

As the weather events become more extreme the likelihood of increased property damage and liability becomes a serious risk for insurers’ balance sheets. If you are an insurance company, in particular, an underwriter, you are going to want to keep track of your claims from the past five years and in coming years to see just how the claims are trending. Alberta has just suffered three monumental property damage events within four years, costing insurers and taxpayers billions of dollars. To ignore climate risk in your insurance portfolio is one of the most foolish things a company can do, especially when it’s on the front line, as all insurance companies are.