Hartwig Turns Back King Hammurabi’s Playbook on Resilience

The U.S. government today may be starting to embrace concepts that date back to Babylonian King Hammurabi’s reign some 3,800 years ago.

When President Barack Obama on July 16 issued a set of climate change initiatives encouraging steps like guarding the electricity supply, improving flood planning, protecting against coastal erosion and storm surge and predicting landslide risks, he could have been calling shots right from a playbook followed by the insurance industry.

The basics of that playbook harken back to early human history, when Hammurabi and company realized risks and disaster needed to be addressed – ergo the code of Hammurabi, which contained possibly the first insurance policy written and included a basic form of insurance decreeing a debtor didn’t have to pay back loans in the event doing so was rendered impossible due to catastrophe.

For those who are coming to the realization that climate change requires not only action but risk management, Robert Hartwig has some news.

“The private insurance industry has been at the vanguard of these issues for decades,” said the economist and Insurance Information Institute president, who many consider to be the face of the industry in Congressional hearings, during global disasters and to the general public.

He was referring to the growing cacophony of calls for better understanding of extreme weather events and how they will impact people and businesses, but then he noted that what the industry has been doing for millennia in regard to resilience is “absolutely consistent with everything the administration would want to achieve.”

During his remarks on the initiatives in July Obama hit on several topics for which the insurance industry already has its terms, “modeling,” “underwriting,” and of course “resilience” – the latter is a concept that has become new once again in the face of climate change.

“We’re going to do more, including new data and 3D maps to help state, local officials in communities understand which areas and which infrastructure are at risk as a consequence of climate change,” Obama said. “We’re going to help communities improve their electric grids, build stronger seawalls and natural barriers, and protect their water supplies. We’re also going to invest in stronger and more resilient infrastructure.”

When talking about climate change and the role the insurance industry will take in addressing and adapting to a changing world, Hartwig gets tad touchy, like he’s been over this – again and again.

He gets same basic question from the government, and the media, a great deal lately.

“What is the industry doing to prevent climate change?”

There are myriad ways Hartwig answers.

“We’re not a greenhouse gas emitting industry,” is one.

His favorite answer is to point out that the industry is constantly evaluating risk, and thanks to the policy seller-holder relationship in which policyholders pay less for being and building safer, insurance buyers have an economic incentive to reduce that risk.

When change does come, or disaster strikes, the industry responds by paying claims and often changing its views on the nature of things. It adapts.

“The industry has been managing variability since the first insurance policy was written,” Hartwig said.

Hartwig offered as proof to back his statement how “magnificently” insurers performed following 2012, a year that resulted in $35 billion in insured losses from catastrophes, the majority of those from Superstorm Sandy.

The improvement was largely on growth in premiums and a reduction in both private insurer catastrophe and non-catastrophe related loss and loss adjustment expenses, according to a report from I.I.I.

For 2012 the industry combined ratio fell to 103.2 from 108.1 in 2011 on underwriting losses that shrank by 54 percent to $16.7 billion from $36.2 billion the year before, according to I.I.I.

“I think that what is very often lost [when the topic of climate change arises] is that it is at the core of the insurance industry’s DNA to continue to monitor these risks,” Hartwig said.

Many of Obama’s latest climate change related incentives – they followed The White House’s National Climate Assessment report in May, and are part of the government’s effort to prepare the nation for the impacts of a changing climate now and in the future – are merely a call-to-arms to make society more resilient.

It’s true that resilience is part of a long-standing insurance industry message, but what if a push from the government does mean that homes do start getting built better and communities are being planned with disasters in mind? Wouldn’t this ultimately reduce claims payouts and make the industry more profitable?

Hopefully. Not necessarily. Major hurricanes, tornadoes, floods, earthquakes and massive wildfires year-in and year-out haven’t changed how people behave or their view of risk.

“More and more people are moving into homes and working in businesses that are in harm’s way,” Hartwig said.

People still flock to coastal zones to live by the sea, or they yearn to own homes in places that offer airy lifestyle opportunities that come with living in the wildland-urban interface. Neither Sandy nor the recent plague of wildfires many believe are due to climate change-driven drought conditions that have prevailed over the Western U.S. for the last three years are stopping people from migrating to these beautiful but often dangerous areas.

While the government may be able to deem areas risky and create laws, incentives and regulations to deal with this risk, the insurance industry for its part has just let nature take its course.

“The insurance industry is not the demography police in the Unites States,” Hartwig said. “We cannot tell people where they can live. All we can do is send them a signal about the riskiness of all of that.”

Emphasizing his aversion to authoritarian measures, he added, “We’re not the climate change police.”

Finally, Hartwig held up the National Flood Insurance Plan to drive home his message.

“The best way to drive and drive quickly greater resilience is to allow insurers to charge prices that will reflect the risk and that are unfettered by any government restraint,” Hartwig said.

But with NFIP, he said, the government subsidizes flood insurance and encourages people to live in flood zones.

In 2012 NFIP was amended to save the program from fiscal ruin by reducing subsidies so people in flood zones would have been paying rates reflective of where they reside, although a politically risk-averse Congress eventually backtracked.

“There are forces in some parts of government that seek to reduce exposure to climate change and elsewhere in government there are equally powerful forces that seek to maintain the practice of granting subsidies that increase the impacts of flooding,” Hartwig said.

Email the writer: djergler@insurancejournal.com