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Bloomberg View: On Climate Change, the Market Has Spoken
POLITICS VS. PROBABILITY

On at least one subject, the free market and its traditional political supporters have been thrust into conflict. That subject just happens to be the most important one facing the planet. A number of Republican Presidential candidates have made questioning the legitimacy of climate change a significant part of their campaign strategy. Rick Perry and Michele Bachmann dispute whether global warming is man-made. Perry suggests that climate is affected by many variables, which scientists can manipulate “so that they will have dollars rolling into their projects.” Mitt Romney is on the fence. Only Jon Huntsman Jr. has declared definitively that he “trust scientists on global warming.”

Politicians have been known to dissemble about risk because voters don’t generally like to hear bad news. The insurance industry makes its money telling it to you straight—how long you’ll likely live, what price your home will fetch, whether to repair or trade in your car. For this reason it’s worth noting that insurers already factor climate change into their models for measuring, pricing, and distributing risk. Insurers have no incentive to lie. If they are more scared than they should be in pricing risk, shareholders will punish them. If they aren’t scared enough, nature will do the job.

No one can say for certain that any single weather event flows from the warmer air caused by carbon emissions, which in turn leads to more rainfall, floods, and snowfall over some parts of the planet and more severe droughts in other parts. But last year was the hottest on record. Arctic ice is at record low levels. Regardless of what politicians say, insurers must factor all this into premiums.

Swiss Re, the second-largest reinsurer, is developing scenarios using probabilistic modeling to help government officials cope. It studied the effects of climate change in vulnerable areas such as Samoa, Mali, the Caribbean islands, and Miami. No matter which model it chose—current patterns continue, moderate changes, or extreme changes—Swiss Re concludes it’s cheaper to adapt now rather than wait. It recommends building codes that require more water- and wind-proofing; zoning laws that prevent planting trees close to buildings and power lines; redesigned beaches that absorb storm surges; and restoration of wetlands.

Hurricane Irene, and the estimated $5 billion to $7 billion in damage claims insurers now face, has been swept up in this debate. Irene traveled farther north than hurricanes usually do—and dropped extraordinary amounts of rain. At the same time parts of the U.S. are experiencing record-high temperatures and Dust Bowl conditions. (Houston hit an all-time high of 109F the same day Irene was roaring up the Eastern Seaboard.)

A storm with Irene’s fury will only cause more damage in the future. Rising sea levels will allow storm surges to penetrate farther inland. And Americans pushing relentlessly toward the East and West Coasts are putting themselves and their property in harm’s way.

If elected officials want to help constituents prepare for disaster, they could fight for legislation to curb carbon emissions and could keep people from building along coastlines. Politicians have enjoyed enormous success calling scientists into question. The market may not prove to be such an easy target.