Guest essay by Eric Worrall
According to Chris Leithner, founder of Leithner & Co Investment Advisors, the apparent upward trend in weather disaster insurance payouts disappears when you correct for inflation and rising population.
Will climate change soon make Australia “uninsurable”?
Leithner & Company Ltd
To many investors, it’s indisputable: a warming climate has caused the number and severity of natural disasters to increase. Moreover, this supposedly rising tide of devastation threatens Australians and their insurers. These claims are being repeated increasingly frequently and fervently, yet a glaring weakness accompanies them: they almost invariably lack credible – indeed, often any – supporting evidence. In contrast, I’ve analysed this country’s most authoritative source of relevant data, the Insurance Council of Australia’s Historical Catastrophe Database, and this article summarises my results.cause; consequently, climate change – man-made or otherwise – can’t be causing it.
Are natural disasters becoming more frequent in Australia?
I grouped the 302 events that meet this definition into their financial year of occurrence and summed the number of events per FY (all subsequent references to “year” mean FY). Figure 1 plots the results. At first glance, the number of NHCEs appears to be increasing over time. The average is 5.6 per year; before the mid-1990s, the annual number was usually below-average; since then, it’s mostly been above the mean, especially in 2016 (but not, it’s worth noting, in 2020 or 2021: their numbers are the lowest in almost 20 years). As a result, the trend line slopes significantly upwards – and its rate of increase is accelerating.
In 1967 the Gold Coast’s population (72,000) was just one-tenth of today’s (710,000) and Cyclone Dinah missed it by more than 100 kilometres. If it recurred today it would wreak almost $5 billion of damage and rank among the costliest natural disasters in Australian history (Figure 6). Together with the severe hailstorm that struck the region that year, their combined normalised cost ($6.3 billion) was double that of Brisbane’s flood in 1974.
The key point in Table 1 generalises. Figure 2 plots the average damage per NHCE since 1967 – and corroborates my doubt that the actual (as opposed to the recorded) number of NHCEs is rising. Its mean is ca. $350 million and its trend is weakly negative. I don’t infer that NHCEs are becoming less destructive over time; rather, I infer (and will shortly confirm) that the damage they wreak is roughly constant and the ICA’s propensity to count them has risen. In other words, it didn’t record minor events in the 1960s and 1970s, but has done so since the 1990s.
Do these results enable us to reject categorically any possibility that the frequency and severity of natural disasters is mounting? They don’t. Nor can we be certain that our conclusions will extend into the future. Equally, however, proponents of the received wisdom must be humble and honest. They cannot credibly claim – as they nonetheless routinely and emphatically do – that natural disasters’ frequency and severity are increasing, that climate change underlies these rises, and that consequently, they threaten insurers. Hard data simply doesn’t support these glib assertions; quite the contrary, they undermine them.
My results won’t surprise Warren Buffett. That’s because they corroborate with Australian data what he has found in American and global contexts. As the founder, head and biggest shareholder of one of the world’s biggest insurers and reinsurers, his view should carry much weight – and unlike most experts, he has plenty of skin in the game. On 3 March 2014, he told CNBC:
Chris Leithner does not reject the possibility climate change could create problems in the future. What his analysis demonstrates is claims that climate change is making weather disasters worse is not supported by historical trends, once you correct for inflation and population growth.
via Watts Up With That?
January 9, 2022 at 08:28PM