Insurance rates reflect science

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By John Bartlit

Hurricanes, as we saw last week, are complex. Such events bring out only a few of the talking points, which leaves a good many pertinent factors still drifting in the dark.

Think where we are today. Republicans and Democrats have settled into rejecting each other’s beliefs about sea rise from climate change. Further, the two parties cling to opposing views of big corporations. 

Imagine if a big business were to change the conversation about sea rise. This outcome is not as crazy as it seems. Sea levels affect many interests. Average sea levels in the future will rise or not rise. Each possible trend results in a different amount of flooding near coastlines. Floods near the sea may get worse or stay the same.

A flood means a streak of bad business hits a lot of people all at once. A flood also means a patch of strikingly good business comes in a rush. Bad business for homeowners, churches and shopkeepers is suddenly good business for builders and suppliers. In the middle are the insurers. 

A place to watch for news is the future rates that insurers will charge for flood insurance on sea coasts. Commercial insurance companies will respond the way big insurers always have, by applying sound business principles.

Insurers will keep tracking data on the frequency and extent of flooding and calculate their insurance rates accordingly.

The data will say that rates for flood insurance will go up or stay about the same. The changes in rates across regions have to be averaged with care to assess more than local changes, such as added sea walls or the constant erosion of sand barriers.   

The science employed by insurers is a gem to see in sunlight. Methods of analyzing data on physical risks and their economic effects are complex and very well developed. The careful work goes by the formal name of actuarial science.

Many colleges offer programs in actuarial  science and degrees at all levels can be earned in the field.

Actuarial science grew from early methods of calculating the financial risks of statistically possible events. The science began hundreds of years ago calculating the financial effects of dying. It sets the rates charged for being sent a certain sum after death. It is called life insurance.

The methods collect and use statistical data about events that create financial costs for people. The statistics gathered include how frequently the event occurs and how money accrues in the meantime. 

As computing capabilities continue to grow, actuarial science keeps spreading to more varied uses, for instance:

• Designing pension funds,

• Designing federal social benefits funds,

• Analyzing statistics on benefits and risks of prescription drugs.

• New applications lead to newer applications.

Actuarial science has become a structured means of assessing risk from environmental factors. Property is insurable against damage from causes such as wind, hail, tornado, hurricane, wildfire, flood and drought. As do all successful businesses, insurers keep on top of new information that may impact their bottom lines.

The insurance business now is looking closely at data on climate change. Insurers gain most from knowing what is real and what is not real. Insurance companies have no incentive to fool themselves: overpriced insurance loses sales and thus profits; underpriced insurance loses money and thus profits.

Unlike others, insurers do not need to know what portion of climate change is man-made and how much is natural. The total is what counts on their books. Insurers estimate the total economic impacts in the most businesslike ways they know.

They work with consulting firms whose names sound new and environmental, names such as Solterra Solutions Ltd. Insurers are putting actuarial skills to work assessing climate change.

All this effort is pure business. None of it follows opinion polls or party trends.
The needs of business will not resolve all aspects of climate change, but they add relevant dimensions. The advanced tools used in business broaden our viewpoints.