By Jeffrey Ball

The Munich Reinsurance Company has been in the sober business of managed risk since 1880. Munich Re, as it is now known, helped pay for the devastation caused by the San Francisco earthquake in 1906, Hurricane Hugo in 1989, and the assault on the World Trade Center on September 11, 2001. The company, which in 2014 paid out approximately $45 billion in claims and netted $4 billion in profit, employs some 43,000 people—underwriters, economists, accountants, lawyers, and scientists—all working to predict and plan for the future, and with a shared mission: to make sure Munich Re is never surprised. Risk properly calculated makes money for Munich Re; risk unanticipated could bankrupt it.

These days, the greatest unpredictable risk Munich Re faces is climate change. Like other major insurers, Munich Re follows a standard procedure to ensure its premiums are set high enough to cover natural-catastrophe claims. Much of this work relies on what the company calls “event sets”— databases of past claims for a given type of loss in a given area. The company plots information from the event sets on a graph to form “loss-return curves,” which are used to make informed projections for the future. Assuming the curves are accurate—that future losses occur at a rate and intensity broadly consistent with past losses—all is well. Revenue
from the premiums outpaces the costs of claims, corporate income rises, and investors bid up the stock. This is as it has ever been: Floods are few; insurance policies are many.

But insurance companies are starting to worry that climate change will upend the curves. Munich Re began studying global warming in 1974, when, in response to a global surge in natural catastrophes, it founded what it called the Joint Office for Natural Hazards. Known today as the Corporate Climate Center (CCI), the operation involves in-house geologists, geographers, hydrologists, and other scientists who research climate change and then model the ways it might affect the frequency and force of the natural disasters for which Munich Re sells surety.

Peter Hoeppe, a meteorologist, heads the CCI, and his group has concluded that, for the next few decades, climate change will remain fairly easy to predict and thus to insure. Beyond 2050, though, absent massive cuts in global greenhouse-gas emissions, “We may run into a situation where we have abrupt changes, and things become uninsurable,” Hoeppe told me. Abrupt changes is scientific euphemism for major disasters that Munich Re can’t foresee. That translates into premiums set too low to cover unexpected claims—and, more specifically, losses that could wipe out an alarming chunk of the company’s profits. 

Large corporations always have been seen as the villains
of the environmental movement—and with good reason. It was corporations whose cars coughed out smog, whose chemicals produced Superfund sites, and whose coal mining despoiled mountains. But today, in the fight against climate change, big business is emerging, if not quite as a hero, then as one of the world’s most important reformers. Politicians have so far failed to act with anything approaching the seriousness the scale of the problem requires. As governments dither, however, some of the world’s most potent multinationals have concluded that rising temperatures threaten their business. Thus they have begun to respond to global warming in the way they’d respond to any material financial threat: They’re looking to minimize it.

Many of the executives shouting about the perils of climate change from their corporate jets are little more than Madison Avenue marketers, ladling on cheap greenwash to obscure a financial structure that continues to profit mostly by polluting. That’s unsurprising and unlikely to change. What’s significant is that a widening web of corporate powerhouses—most notably in the finance industry, led by big insurers and banks— have begun to demand serious, sophisticated, and specific steps to counter global warming. Big businesses want nothing so much as predictability, and many of them have concluded that climate change is a wild card, one that they must control and ought to exploit. 

Auto, oil, coal, agriculture, and other energy-intensive companies have been participating in the climate fight for years. But their intent has rarely extended beyond regulatory capture: The big burners have sought to be seen as reasonable on the issue because perceived reasonableness affords them a seat at the political table at which carbon-emission restrictions are written—with the cleanup burden, hopefully, shifted to someone else.

What’s happening now is different. Firms with comparatively small greenhouse-gas footprints, notably in the financial sector on which the global economy depends, have concluded their profitability is imperiled by climate change itself. It isn’t in their financial interest to minimize climate curbs; it’s to maximize them. Instead of regulatory capture, they want regulatory crackdown. 

Read the full piece here.