Warren Buffett’s Mixed Signals on Climate Risk and Insurance

When it comes to addressing climate change impacts to Berkshire Hathaway’s insurance business, Warren Buffett paints a somewhat misleading picture that minimizes the business risks posed by a demonstrably changing climate.  In doing so, Buffett begs serious questions about his company’s planning for climate impacts and undermines confidence in the insurance division’s climate resilience.

In a letter to Berkshire Hathaway shareholders ahead of the company’s annual meeting April 30 in Omaha, Buffett denies the impact of climate change on insurable weather-related events, despite scientists increasingly linking hurricanes and extreme weather to climate change.  He notes that, due to the recent decline in super-catastrophe (“super-cat”) events in the United States, “super-cat rates have fallen steadily in recent years, which is why [Berkshire has] backed away from that business,” ignoring that this very volatility in business outlook is at least partly tied to increasingly unpredictable weather patterns.

Buffett also unrealistically suggests that the company can annually adjust its rates in response to changing climate exposures, seemingly without regard for potential rate shocks that could be triggered by such a reactive posture.  Last but not least, Buffett argues that if major climate catastrophes become more frequent, the “likely… effect on Berkshire’s insurance business would be to make it larger and more profitable.” This latter argument ignores the checks and balances of both insurance regulation and market competition that protect consumers from such a “bring it on” mentality.

Buffett’s comments, prompted by a shareholder resolution requesting a report on the Berkshire insurance division’s responses to climate change risks, ought to cause a broad range of stakeholders to sit up and take notice.  Shareholders and others who have a stake in the company’s resilience and long-term value, as well as regulators who are focused on ensuring that customers have access to reliable, affordable insurance products, have vested interests in Berkshire’s climate risk management approach.

Hurricanes, extreme weather and related risks on the rise

While it is true that the United States has not been struck by a major hurricane since 2005, hurricane expert Phil Klotzbach attributes this recent good fortune largely to luck, given that 27 major hurricanes in a row have not made landfall.  Notably, even as the continental United States has been lucky in terms of the lack of seriously damaging hurricane activity in recent years, the Pacific Basin has not.  Klotzbach notes that the Northern Hemisphere broke records in 2015 as El Nino’s warm waters (possibly influenced by global warming) drove major tropical cyclone formations to a record-high 27, almost entirely in the Pacific.  In February 2016, Tropical Cyclone Winston struck Fiji with 185 mph winds, the strongest Southern Hemisphere cyclone on record.  Last October, Hurricane Patricia formed over super-heated ocean waters off the coast of Mexico, becoming the strongest hurricane ever recorded with peak wind speeds over 210 mph.  In 2013, Supertyphoon Haiyan struck the Philippines with 196 mph winds, killing thousands and devastating the country.  These figures are astonishing and alarming in and of themselves, let alone as portents of future catastrophic events.

While hurricane experts are careful to avoid conclusively linking a particular cyclone to climate change, MIT’s Kerry Emanuel does conclude that the strongest tropical cyclones “have no doubt been influenced by natural and anthropogenic climate change.”  What happens when the United States’ luck runs out and we are confronted by major hurricane impacts again?  Are Berkshire’s insurance businesses taking those possibilities into account?  Buffett’s recent rhetoric provides little confidence.

Climate change attribution science advancing

Aside from hurricanes, Buffett claims that climate change has not affected other weather-related events covered by insurance, a position that puts him at odds with a growing body of science and demonstrated on-the-ground impacts.  A recent report from the National Academy of Sciences addresses the topic of whether a particular weather event was “caused by climate change” by refocusing the question as “to what extent was the event intensified or weakened because of climate change?”

The report finds that for individual weather events, scientists have the highest confidence attributing a climate change signal in heat and cold waves, like the record Pacific Northwest heat last June that fed $100 million in wildfire losses in Washington State, and Boston’s record cold and snowy winter of 2015 that contributed to $2.1 billion in Northeastern insured winter storm losses.  Scientists also see a climate signal in droughts, like the four-year-old drought that continues in California, and heavy precipitation, such as South Carolina’s “once-in-a-thousand year” extreme rainfall-driven flooding last October.

Contrary to Buffett’s claims, the question scientists are currently addressing is not whetherclimate change is affecting global weather, but how much of an effect climate change is having?  Are Berkshire’s insurance leaders considering their companies’ exposures in light of these extreme weather trends? Again, leadership from the top seems to be demonstrably absent on these critical, evolving trends.

Troubling claims about climate change and insurance

Buffett’s cavalier assertion of the company’s supposed nimble ability to re-price products when the need arises also ignores regulatory and economic realities – with seemingly complete disregard for potential rate shocks – not to mention the sheer operational inefficiencies of a reactive approach to growing volatility in the external environment as a result of climate change.

In the U.S., state insurance regulators have the authority to approve or deny rate increases, changes to insurance products and coverages, and an insurer’s desire to exit a market.  Regulatory oversight is stringently enforced for personal lines insurance, such as auto and homeowners, which, through Berkshire’s auto insurance giant GEICO is a major business line.  If Berkshire seeks higher rates (or limits coverage), then the company would need to justify those changes to regulators, who could deny the requests.  If denied, Berkshire would have to decide whether to accept lower rates than it would like, or seek to withdraw from a line of business or region no longer deemed attractive.  Market withdrawal encompasses substantial costs for an insurer, however, including writing-off sunk operational costs, employee termination expenses and reputational damage – not to mention lost market share.

Thus, Buffett’s claim that there is a “prompt translation” of increased possibilities of loss into increased premiums is not grounded in the reality of the checks and balances that protect the interests of customers and maintain competitive insurance markets.

Missed public engagement and investment opportunity

Rather than relying on reactive measures, Berkshire’s insurance groups could assume a leadership role within the U.S. insurance sector by engaging policymakers and the public on climate risks.  Berkshire could leverage its expertise and brand to advocate for more actuarially sound pricing in vulnerable regions along with calling for and financing smart, climate resilient infrastructure investments to reduce society’s vulnerability to climate impacts while promoting the resilience of Berkshire Hathaway’s own operations and bottom line.  In this respect, the company should take a page from the cautionary tale of Superstorm Sandy and its wholly owned subsidiary GEICO.

When Superstorm Sandy pummeled the East Coast with massive storm surges, GEICO took record losses of nearly $500 million on 47,000 auto claims due to its exposure in the New York City region, including flood losses covered under GEICO’s comprehensive auto insurance policies.  With the largest auto market share in New York, Florida and New Jersey, three of the states most exposed to sea level-rise enhanced storm surge, GEICO could benefit from engaging with policymakers to advocate for smart flood protection policies and infrastructure spending to reduce inundation risks.

The bottom line

Buffett’s comments on climate change and insurance reflect an unwillingness to confront the reality of the potential negative financial implications of climate change on Berkshire Hathaway’s insurance operations.  Indeed, his rhetoric raises more questions than answers for its customers and shareholders alike regarding missed opportunities to promote resilience in the face of a rapidly changing climate.
 

About the Authors

Cynthia McHale directs the Insurance Program at Ceres. She brings over twenty years of sector expertise working with many of the leading North American and European insurers, re-insurers and industry brokers. In her current role, Cynthia is leading a campaign to promote the insurance industry’s understanding and leadership on climate risks and opportunities. As risk managers, risk carriers and major institutional investors, insurers have a vital interest, and play an important role in fostering society’s response to global warming. Stronger insurance industry leadership on climate change issues will strengthen and accelerate our nation’s transition to a clean energy future while helping to build a resilient and sustainable society.

Max Messervy is a Manager on the Insurance Program at Ceres. He engages with insurance regulators, companies and other key stakeholders around improving the industry’s climate risk management strategies. Notably, he led the development of the 2014 Insurer Climate Risk Disclosure Survey report. 

More information on Ceres' Insurance Program is available here.