The science of climate change appears at the moment to be in a bit of a muddle. But the risk assessment of climate change is beginning to clarify in critical industries and institutions.
The scientific muddle surrounds deviations of some observed conditions from model predictions; specifically, the correlation and causation of increases in atmospheric CO2 emissions to atmospheric warming. While the reason for an apparent divergence has been credibly attributed to a hypothesis of accelerating warming in deeper regions of the oceans, this hypothesis is not likely to be proven or disproved with sufficient data for some time.
This touches on a fundamental challenge of science in the public arena. While our various media have no problem rushing to judgment on the basis of utter speculation, science done properly requires a measured pace, defensible methodology, and opportunity for independent verification, none of which happen in a 24/7 news cycle. To gain a greater appreciation of where the science is, I recommend a recent interview in Der Spiegel with climate scientist Hans von Storch.
Dr. Von Storch states unequivocally his conviction that climate change is real and is subject to human influence, but he has also been known to take his peers to task for advocating their concerns beyond the hard science that can support them. Der Spiegel did its best to put Von Storch to the point on recently reported statistical discrepancies between global warming and the rise in CO2 emissions. Dr. von Storch addressed many of the questions with a studied neutrality; he recognized the questions yet to be resolved in climate science but emphasized that anomalies in the climate change models do not in themselves negate the validity of climate change. They reflect the inevitable refinement of scientific theory that comes with inquiry and observation. The broad theory of climate change remains credible in many of its aspects. It is the underlying mechanics that need further exploration, refinement, and reconciliation to an integrated whole, and that takes time.
Political and economic communities, by comparison, seek greater certainty in shorter time spans. Here, the current dilemmas in the climate change dialogue pose frustration for public and business officials, even though risk is an inherent part of their economic and political environment on a good day. But, while the scientific debate churns on, the economic imperatives are beginning to coalesce in some quarters into uneasy but growing consensus.
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The Biggert-Waters Flood Insurance Reform and Modernization Act of 2012 is a good place to start. It recognized that, whether one believes in Climate Change or not, the cumulative losses of progressively more severe weather events are taking a financial toll that can no longer be ignored, (though some would like to defer the proposed insurance rate increases just a bit longer). And then along came Sandy to put a rather large exclamation point on that thought in bold.
A report from the Geneva Association, an insurance industry group, makes a critical point that global warming/climate change (by whatever other euphemism or rhetorical dodge, like ‘extreme weather’) has reached a statistical milestone of criticality that can no longer be ignored, or managed based on historical trends alone:
This statement is critical from this industry because it not only reinforces the thrust of Biggert-Waters; it should send a warning to other financial intermediaries and governments of the need to project forward and plan forward and not merely manage the climate progression with an eye solely on the rear-view mirror.
However, another report from CERES indicates that the insurance industry worldwide is significantly unprepared to deal with the financial consequences of climate change. It conducted its second annual survey of insurance industry preparedness for risk exposures of climate change.
“The answer, unfortunately, has not changed since our first report analyzing the insurance industry’s readiness in September 2011 concluded: “not very.” The implications are profound, for the insurance industry is a key driver of the national and global economies. If climate change undermines the financial viability of the insurance industry, it will have a devastating impact on the economy, as well.”
Only 13 out of 184 insurance companies have a comprehensive plan to address climate change as it will impact their operations administratively or from an underwriting and investment perspective. Many consider it an extension their normal underwriting and investment management processes. While this may be true in certain qualitative respects, it ignores the order of magnitude and the possible variance from traditional statistical patterns that are critical to decision-making, as noted in the quote from the Geneva Association’s report.
When we talk about economic resilience to catastrophes, the insurance industry is a critical player. Katrina, Irene and Sandy have already illustrated the weaknesses of our current system operating within its traditional parameters. While the storms have been within the industry’s economic capacity to handle, the administrative processes of rapid and reliable response have been disheartening in many cases, and have been a major element inhibiting resilient response for many communities, businesses and individuals. If we add to this condition a failure to build adequate reserves for future trends, we worsen an undesirable situation.
This was further confirmed in a warning by the Geneva Association, which noted that parts of the UK and the State of Florida are now regarded as uninsurable, with more likely to follow. It further noted:
“…insurers warn premiums have been kept artificially depressed in the short-term because capital has flocked to the sector in the face of historic low-interest rates.”
A reasonable inference from this statement would be that when interest rates rise, capital may seek better returns elsewhere unless insurance rates rise as well; and if exposures continue to rise as well at an accelerating rate, the insurance industry will either be caught short in capacity, or more likely will withdraw coverage to stay within its underwriting capacity. Either way, the industry will likely raise rates significantly where it is still willing to underwrite (think of health insurance as an analogy), and the economy will lose critical financial liquidity which the insurance industry provides for resilience.
Reports such as CERES’ and the Geneva Association’s are important in recognizing that, while we do not yet have the answers to the climate puzzle that scientists are diligently working on, neither do we have the luxury of waiting for them. A recent statement from the World Bank added emphasis to this observation.
“Places such as Bangkok, Jakarta and Ho Chi Minh City are now considered “hot spots” that will bear the brunt of the impact as sea levels rise, tropical storms become more violent, and rainfall becomes both more sporadic and — in the rainy season — more intense.
Bank officials said this week that those effects are not considered a distant risk anymore, but rather are a near certainty “in our planning period” of the next 20 years or so.”
While the World Bank’s focus is on developing countries, the challenges they are addressing affect the globe in the same time frame.
Business and government must begin to plan across a wider range of contingencies and to a more distant time horizon consistent with the expected impact life-cycle of their decisions. But in this very statement is embedded an irony. While we may project that sea level rise may reach four feet or whatever by 2100, it will reach a point of significant impact much sooner, and require responsive action. Given the complexity and number of exposures, and the challenges of planning and consensus-building, critical impacts which may occur as soon as twenty years from now will require us to begin planning and building responsive capacity now to meet the more likely near term, and anticipate the less certain long term.
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Returning to the Der Spiegel interview, von Storch believes that:
“the more serious effects of climate change won’t affect us for at least 30 years. We have enough time to prepare ourselves.”
I would like to think he is right, but I don’t. There are two categories of concern; one scientific, and one managerial.
In the scientific category, there are two issues other than the divergence of atmospheric warming from CO2 emissions that beg for clarification. One is, if the oceans are warming at deeper levels than previously believed, does this mean that the capacity sea level rise is greater than anticipated, and how might that affect the acceleration of rise over time? Will it hasten it?
The second issue comes from a somewhat muted reference in the USGS release projecting an increase and acceleration of sea level rise on the Atlantic coast.
“The report shows that the sea-level rise hotspot is consistent with the slowing of Atlantic Ocean circulation. Models show this change in circulation may be tied to changes in water temperature, salinity and density in the subpolar north Atlantic.”
If this is referring to a possible slowing or shut-down of the Thermohaline Conveyor, that poses a whole other set of interesting scenarios, many of which would affect the UK and northern Europe, but some might affect the US east coast, such as the possible influence of the current in steering hurricanes away from the east coast,….or not. I remember when we convened a workshop on Climate Change for municipal officials in 2004 that this possibility was seen as serious-but-remote. It is apparently no longer remote. Is it still serious? Pure speculation on this accountant’s part. Outside my skill set, except for the possible economic consequences.
In the managerial area of concern, I will repeat a skepticism voiced in prior posts. There are two aspects to the Climate Change challenge. One is figuring out what nature will deliver; the other is the issue of how we will respond, or what I call ‘capacity to act’. While we wait for science to sort out answers to the first part, experience suggests to me that society as a whole has demonstrated decisively that we are unwilling to recognize the severity of the problem, and therefore unwilling to act to positive effect. Our capacity to act is at best questionable.
Dr. von Storch may have a good handle on the natural science end of the issue, but he is disturbingly complacent about the social and economic and political science end.
We can all have our opinions, but nature will have the final word.
Or, to borrow a baseball analogy that I recently read: “Mother Nature always bats last; and she’s not limited to 9 innings.”
Onward
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Integrated Man 