There are challenges that the insurance industry faces, even though it can look like a licence to print money, Since the Big Bang of the nineties, when deregulation allowed the industry to flourish, insurance now accounts for 2.5% of UK GDP. Not bad money for an industry that is a cost to society, rather than a benefit.
Until now the business model has been simple; charge a premium based on the risk profile of the customer, avoid high risk customers altogether and invest the payments you receive in the markets to make even more money. And, unfortunately, payout when someone makes a claim, but keep the legal profession gainfully employed to ensure that doesn’t happen too often.
If you find claims are rising, imply put up th premiums next year. Which is why we’ve had several years were premiums have grown significantly faster than inflation. The consequence of that is people from lower- and middle-income households simply can’t afford the insurance, so they avoid it altogether or under-insure.
Phil and Steve discuss the merits of government-run insurance. We already have it in health, of course. The problem with having it applied more broadly is that it won’t alert us to the impact of climate change. As insurance moves from covering us for episodic events, to systematic change, the business model folds. Steve’s hope is that, as this happens, the industry starts to squeal and wakes us all up to the profound impact of climate change. It acts as the canary in the coal mine and becomes the first industry to lobby for us to take it seriously. Although, with them still enjoying healthy profit margins, it’s not happening yet.
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[00:00:00] Are insurance companies better positioned than politicians to drive meaningful action on climate change? In other words, where politicians are dithering, might now, because insurance won't be written in areas that time and again are in the path of extreme weather, might this bring about the change that's necessary? This is the Debunking Economics podcast with Steve Keen and Phil Dobbie.
[00:00:28] Yep, couldn't have put it better myself. That's a YouTuber called Michael Smirkonish, yes real name, asking whether insurance companies with the most to lose will be the first to campaign for government action on climate change. Well it might be a bit late already but that's our topic today. Plus of course it's an opportunity for just a bit of a general whinge about insurance isn't it really? That's this week.
[00:00:56] So this week we're going to talk about the insurance industry and the reason we're going to do that Steve is because a few weeks back you said that you could see that the world is going to become uninsurable and that's going to be the downfall of our financial system. So just the end of finance. So we'll investigate all of that which sounds like a lot of fun. We'll investigate all of that this week.
[00:01:17] But first of all, what set me off down this track and we will have all had experiences like this. I tried to change the insurance on my car. You know, we all get insurance for a car because you have to and then there's a question about, you know, do we insure everywhere else where we should. There's a huge problem with under insurance which I'll come to whether that's a good or a bad thing. But with my car, and I'll mention the company, it was Marshmallow.
[00:01:44] Oh my God, that's a name that gives you this real substance behind marshmallows. That's right, we're a bit squidgy. Is it run out of Nigeria? No, I don't know. Who knows where this comes from? It's possible the way the story is moving up. Well, they're all for some reason, they're all in Wales for some reason. So, you know, not far from that. So Marshmallows in Wales. Okay, this is opposed to Christians in Wales. All right. Yeah, yeah, yeah. So anyway, I'd got my car. We've got a second car for a long time. My wife has been going on about the same car.
[00:02:13] So now we're now a two-car household. Four people in the house, we've got two cars, which is fair enough, I think. But anyway, the one car had gone down from being used for 16,000 miles a year down to 5,000, but was insured for 16. So I went to the car insurance company and said, you know, it's changed. And of course, you have to do it all online. So I changed the details about what the mileage was, expecting that there would be a significant premium reduction.
[00:02:40] Because I would have thought the risk of me getting involved in a crash would be two-thirds less if I'm driving two-thirds less of the time, you would have thought. So maybe the insurance would be, maybe not two-thirds the time, but half. But anyway, it was reduced by, I think, about 17 or 20 pounds. And the cost of applying that change was 45 pounds administration fee. So I ended up paying 25 pounds. For the privilege of reducing your insurance. For the privilege of downgrading my insurance policy.
[00:03:08] So when I quizzed them on this, they said, you know, why? Why just there's such a small reduction? And they said, oh, that is because it's based on real-time wholesale market pricing. So obviously, at that precise time, there wasn't a great deal of demand for people who were driving less. So I tested the theory, and I found that my $850 premium, if I took it brand new somewhere else with my new mileage, was only going to cost me 300 pounds, not 850.
[00:03:38] So I challenged them on that. And in the end, they said, okay, well, what you could do, of course, is leave, which I did. And they said, we will pro rata pay you back what you owe, plus we'll take out, I think it's $250 admin charge, or 150, for the honour of doing that. So that's what we did. And I worked out pro rata. It was exactly one-third into the year. Their calculation of one-third of the year was different to mine.
[00:04:07] Therefore, the amount they were going to pay me back was wrong. But this is scientific fact. Number of days, pro rata. So you can easily work out the number of days and how much they owe you. But they were like 60 quid out. And I was in above rather than a discount. Yeah, exactly. They were giving themselves 60 quid more. Just clarifying that. Yeah, yeah, yeah. You did leave a certain uncertainty hanging in the air. No, no, not with insurance companies. It will always be they win. That's the simple argument. Yeah. So anyway, and I challenged them on that. And they said, oh, well, that's what our algorithm says.
[00:04:37] So I'm saying, well, okay, you probably need to change your algorithm, because if you are systematic, if your algorithm is systematically overcharging people, this is how class actions come down. You know, if you did it for 20 years or 10 years and you did it to everybody, you're going to owe a lot of money somewhere down the track. And if it's found that it's all down to some bit of computer code. But maybe it's just insurance companies trying it on. Anyway, in the end, I got them to halve the transfer fee. But the fact is, I spent an afternoon working with an insurance company. Who's got the time? And that got me thinking.
[00:05:06] And I'm not saying that Marshmallow are shysters, because I don't want to get sued. Well, they're not snowflakes, obviously. But they're not snowflakes. They are. But they aren't white and squidgy. I'm sorry, mate. Have they talked about Monty Python skit and I wasn't pre-warned? No. Marshmallow. The Marshmallow insurance company. So I had to get that out. Anyway, so then I thought, well, you know, this all does raise the question, doesn't it, about insurance? It is a license to print money.
[00:05:36] But how effective? Until everything goes belly up, which is what we're talking about. Well, there's the other thing, you see, with this insurance policy, right? This is why I was also looking at it thinking, because the car's worth about £6,000, right? So £850. The year before, it was like £1,200. £1,200 to insure a car that's worth £6,000 is a bit crazy. And then there was £900 excess. So I'm thinking, so if something did go wrong, then I've paid a third of the cost of the car.
[00:06:03] So the insurance was based on the assumption it would be completely written off in three years' time. They just, you know, but they cannot lose, except they did because I went somewhere else. But it's just a crazy industry that is making a lot of money out of something that we have to do. But, I mean, if I had the choice, I think I'd go, well, it's, you know. And I looked at third-party insurance because I think it's not worth insuring. But I do need to insure in case I kill somebody.
[00:06:34] And the difference between third-party and fully comp insurance was nothing at all. Just, you know, third-party insurance just seems like it's just there now because they have to offer it. So I don't know. It's – so insurance companies are there. They're making a lot of money. Actually, two and a half percent of GDP in the UK is the fucking insurance industry, Steve. Two and a half percent. I'm not amazed. I mean, because what insurance companies do, and the reason we practically need them,
[00:07:02] is they distribute the episodic risk of events. So, you know, there's going to be some house in – some in the UK is going to suffer from a flood. Or some person is going to have a car accident. And what we do is we don't know who it's going to be. So we have a probability of it happening. And we pay a bit more than the probability times the cost as our insurance premium.
[00:07:30] And it means that if we're the unlucky individual who has that event, then we don't get wiped out. And this – I mean, that's the legitimate basis for insurance in general. But it's an argument in favour of a government insurance system rather than a private one. Because with the private ones, people don't realise this. I found out – I found the soft way – the soft end of a hard bargain when I had somebody drive through a roundabout in Sydney at 70 kilometres an hour,
[00:08:00] believing it was a giveaway to the right sign, smashing into me as I was sneaking in at 10. And then he made the mistake of telling the policewoman that I entered the roundabout first. And he got a quick lesson in the actual legalities of roundabouts. But it's – So it was this recently? Oh, it was decades ago. No, no. I think I had – I think my hair was a different colour back then. You can't insure against that, can you? No. So I would.
[00:08:27] I was literally – you know, he got caught up on all the – he tried to get out of it. And what happens when you buy insurance from somebody, there's a quid pro quo in any contract, an offer and an acceptance and has to be an exchange of value. And when you buy an insurance contract from somebody, you assign the right to sue to that company. So that company adopts your right to sue.
[00:08:50] And so what then happened with the other party when he suddenly got school in the actual legalities of roundabouts, he then tried to reverse his argument to say that he got into the roundabout first at 70 kilometres an hour and I got in second at 10 and somehow he managed to hit me. Well, that didn't go down too well. So I got a claim from his insurance company for me causing the accident. And fortunately, his insurance company was the same as my insurance company. So I sent them the legal document and then that was the end of that particular claim.
[00:09:20] Now, that's – if you aggregate up, what you've got is all these insurance companies hiring lawyers to sue other insurance companies over who's going to end up paying the episodic cost of a car accident. So in my experience of it, it's one of the most obvious areas of commerce that makes more sense to be provided at a state level where everybody has the same insurance company. You have much lower premiums.
[00:09:47] You wouldn't have all the lawyers involved in fighting over the bits and pieces of episodic events in car accidents and fire. But it's competition, Steve. Oh, yeah. Competition is so important. It drastically reduces costs. All these lawyers drop out of a tree. It's cheap and free. We call them drop lawyers in Australia. Well, it's so good for the economy because it's keeping all those lawyers in jobs. But, I mean, this did – I mean, it's the 80s that created all of this, isn't it? It was, you know, that big bang.
[00:10:14] What a great event that was where we saw all of this opening up to competition for financial services and insurance. And as a result, insurance is now 2.5% of GDP. Yeah. So a cost is 1 40th of GDP. And this is a nice little point from one of my students. I sure remember them raising it in a tutorial back at Western Sydney. I trashed a student last week, so I've got to say something very positive about one today. And that is he said, is finance a cost center or a profit center?
[00:10:44] And he just made sense. Hang on. If finance is growing, you're actually celebrating the rising cost of doing business. So in that case, insurance is a cost. So you'd be better off trying to reduce the cost of the whole thing. But the real reason this matters for our conversation is that insurance is designed to spread the risk of episodic events. Yeah. You've got a 1 in 40. So when we have a systematic change. Systematic is another story entirely. And that's what we're facing with global warming. It is.
[00:11:12] And let's focus in the entire second half on all of that. I'm quite happy just, you know, dissing the insurance industry for the first half. I'll put a few. I've got my nose ready. But I mean, because the other issue is, of course, as well, that it's getting better at defining who and what it will insure and what those costs are.
[00:11:34] So, for example, artificial intelligence is reading an article today about how, you know, artificial intelligence could be used so that you get insured as you use, basically. So you put into your map to say, OK, I want to go to Liverpool. Well, that's going to put your insurance up straight away. And I'm going to take the M6. But I'm going to take the M6 toll road because that's a little quieter, which costs me a bit more. And they might go, OK, well, in that case, we'll reduce your insurance premium for that trip.
[00:11:59] I mean, then if insurance is so fine, you know, based on who I am, what my record is, the route I'm taking, how tired I am, maybe all these other factors. That's not insurance, is it? I mean, that is getting it down to the cost, which is so finitely defined. Why would I need insurance? Why wouldn't I be taking that risk myself?
[00:12:21] And the more you define it, the more insurance premiums go up so much for those people who are a higher risk that they can't afford the insurance, so they don't have it. And those people who it's low risk, the cost is so low, they think, well, I might as well do it, I guess, because we're only talking a few pence. Yes. So the idea of private insurance ultimately is it is only going to insure those people. It's not going to cost them any money. Yeah. And everybody else will become uninsurable, which I think is – Yeah, which becomes one of the paradoxes.
[00:12:51] We've all been through that with insurance companies. I had one time when very, very early days of installing car alarm systems. I think my – it was either damaged or stolen or something like that. And the insurance company turned it down because it wasn't recorded on the contract. There was no option to record it on the contract because it wasn't a standard object at the time. So they're forever trying to evade the direct consequences.
[00:13:16] And that's a bit like – you know, with AI, they fine-tune it, as you say, which road you're driving on and which direction on what day. But it's still – that's still stuff which is tailored to make as much as they can out of the episodic events. So we pay more than – in the individual, we pay far less than the cost. If you have a car accident and you wipe out – I don't know, say you bump into – no, not Jeremy Corbyn. It's Starmer.
[00:13:42] If you have a car accident and write off Starmer's car, bound to be worth a fortune, then you can't afford it. You're in the wrong. You go bankrupt. So you pay far less than that cost, but it's distributed across many, many people. And you pay – in the aggregate, we pay far more. And that's where the profits of the insurance companies come from. Well, as I said, it is – And healthy profits, they are too, aren't they? Well, you must have the numbers. Well, I've got some. So I've got it for Aviva, which is the largest insurance company in the UK.
[00:14:10] So their gross profit margin – have a guess, last year – you would have thought this is high – Gross profit margin. Yeah, you'd think this is high turnover, low margin business, wouldn't you? You'd be thinking, well, you know, they would be dealing with – The 25% comes to my head. Well, not quite that. Well, last year wasn't that bad, 16.8%, but 21.3% the year before. I mean, this is a vast amount of money that they're making. Yeah, yeah. And, of course, it's – and they're investing this money as well, of course. So it's a – Speculating, please. Yeah. Sorry.
[00:14:40] Yes, speculate. Well, the whole thing is a risk game, isn't it? So they insure based on risk, and then the money that they get, they make a calculated risk as to what returns they can get from how they invest that money. Share markets and bonds and so on and so forth, yeah. But by and large, that's their main game, isn't it? It's their investment. It's just another way of getting money to invest to try and get – Yeah, because your money is effectively in a scrow. But actually, it's been paid to them, and they think of you a service over that year.
[00:15:06] But, of course, that gives them a cash pile that they can put into other activities. So they're charging you, and they're also trying to make money out of the gain. And this isn't insurance in this instance, but one thing I was vividly aware of in the 1980s, before the stock market bubble of 87, was the increase in the amount of money by superannuation firms going into share market purchases. So at the beginning of the 1980s, 30% of superannuation money went into the stock market. 87?
[00:15:37] 70%. And, of course, that turbocharged the bubble, which then turbocharged the crash. You know, people are too young to remember or too forgetful to remember. That stock market crushed 25% in one day. So, you know, you can have a wonderful period for seven years, and then, bang, it's all wiped out in a day. But, yeah, they're jumping in front of that particular steamroller trying to pick up pennies as well. So, I mean, you mentioned, you know, the government should be providing insurance.
[00:16:05] They do, of course, for a major expense – a major expense in America, obviously, is health insurance, which we don't have in the UK because, in effect, the National Health Service is insurance cover. So we do have the government. Real rather than monetary, of course. Yeah. Yeah. So we do have that there. Whereas America spends – well, depending on what numbers and what year you're looking at – somewhere between two and four times. I think normally it's about three times the amount that the UK spends on health.
[00:16:31] And that is because about a third of the – I think it splits about three ways, actually. I mean, I could be wrong on the complete detail. But roughly a third of people are paying health insurance costs. That's, you know, a third of the expense. A third are just paying out of their own pocket for medical treatment. And a third is being provided by the government.
[00:16:57] Whereas, obviously, in the UK, it's pretty much 100% is being provided by the government. And as a consequence of that, because of that open competition that they've got, they're paying two or three times in total for health in the United States compared to the UK. And the upshot of it is they've actually got a shorter lifespan. Yeah. More disease, the shorter lifespan. It's a bargain in every way you look at it. The bad one. Yeah.
[00:17:24] So – and yeah, interestingly, they have mortgage insurance provided by the government. It's out of the – what do they call it? The national housing scheme or whatever. Mortgage insurance goes to the lender, not to the borrower. Okay? Right. Let's not forget this. This is – people think when they're forced to take out mortgage insurance, when they have too low a level of deposit to avoid that right, and it's getting – virtually everybody has to pay it these days. That's insuring the lender in case you can't meet the loans. It doesn't help you.
[00:17:54] Yeah. So I think that might be why it's covered by the government, because, you know, the American government is the best one that money can buy. Yeah, exactly. So it's there. Maybe there was these days. Well, the whole idea was – Temporarily. Yeah. The idea of the insurance was so more people would take out loans to get houses. So it would help the housing sector. Yeah, that's right. And it did. Keep the bubble out. It came out of – yeah. Keep the bubble flying, as George Orwell might have said. Well, it goes back a long way in the United States, though. It goes back to just after the Great Recession in the 1930s
[00:18:23] when they introduced it to try and get people back into buying houses. So there's a couple of examples. But generally, though, we are uninsured – not necessarily uninsured. Well, you are more likely to be uninsured, obviously, if you come from a lower-income household. In America, there's areas which you're just – you're uninsurable, and we'll talk a lot about that in the second half. But, for example, a lower black community's cost of insurance is too high, so they just don't get insured. But lower-income households are more likely – as you might imagine –
[00:18:52] are more likely to be uninsured just because they can't afford it. And they probably have higher premiums because they are, you know, high-risk because they are low-income, and therefore they're probably going to leave the toaster on or whatever insurance companies work on the basis of. So it's a – without the government intervention like we're seeing in the National Health Service, then you are going to have this huge discrepancy where some people might have a fire in their very expensive house and get all their money back.
[00:19:18] Somebody has a chip fire in the house that they've been scrimping and saving for, and they lose everything, and they're out on the street. So it's – yeah, there's no good in this, is there, in the insurance industry? Well, I mean, there's no good in letting the insurance industry self-regulate, which is what we've allowed, and set their own premiums. And, you know, the extent to which people don't realise that when they take on
[00:19:47] an insurance contract, they're passing on their right to sue. And then part of the calculation insurance companies make as to whether they're going to pay up or not is whether it's worth their while to get that right or whether they'd be better off, you know, somehow reneging on the obligation and then not getting it right which they regard as worthless. So all this stuff is a way in which competition makes things worse, not better. Yeah. And then, obviously, an opportunity to keep on embellishing your profits,
[00:20:17] so just vertically integrate. So if you're a car insurance company and you're getting car repairs, then why not own the car repairs because you can charge a great deal for the car repairs and get people to pay the excess fee so you win there as well because, you know, the criteria is… Did you tell me Marshmallow owns car repair companies? I don't think they do. I think they are. They're one of… They are… And, look, you know, they are the same as all the others. I've got to look this up. I mean, I don't trust you, mate, Marshmallow Insurance. Come on. But there are so many. There's literally hundreds of insurance companies.
[00:20:47] And the reason is because they are… Who the hell chose that name? This is trustless. Because they were sure… Let's do the break and I'll bring up Marshmallow Insurance. Okay. All right. Good opportunity to take a break. Then just don't take any out with them, Steve. I don't want to get sued by them, though, because they've obviously got lots of money. Marshmallows, I'm interested. All right. Look, climate change is the important factor. We'll look at that when we come back on the Debunking Economics podcast. He's not joking. This is the Debunking Economics podcast with Steve Keen and Phil Dobby.
[00:21:20] Well, Steve has spotted Marshmallow Insurance. There are hundreds of these companies, Steve, because it basically is a financial exercise, isn't it? You just need a spreadsheet. You know, you've got a customer contact center. You've got a risk model. You bring the money in. You work out how much is going to go out in premiums. You'll have a team of lawyers to challenge those premiums.
[00:21:44] And then you use the rest of your – the other 90% of your day is spent investing that money so you get a better return. So you're getting these very high margins. So, I mean, you can imagine that the amount would escalate. You say, well, okay, but that would mean there's increased competition so those premiums would come down. But – Yeah. Good luck with that. Yeah, it doesn't seem to have happened, does it, when 2.5% of GDP is accounted for by the insurance industry.
[00:22:10] But, I mean, you made a comment a while ago, and we were leading to it in the first half, that the world's just going to become uninsurable. I mean, we – there are pockets of uninsurability right now where the government has to step in, where, for example, we build houses on floodplains because we've got nowhere else to put them. Just look at Western Sydney, for example. Yeah.
[00:22:34] And the classic example, of course, is Florida, which is both sinking and being flooded at the same time. And then you have outrageous storms. I am still waiting. I mean, I'm very disappointed with the weather. I just was hoping to have a storm pass through Trump's property. So rather than calling it Mar-a-Lago, I can call it Maura Lagoon. That hasn't happened yet. No, because he's got God on his side. Sorry? Because he's got God on his side. That's true. God must be directing him to go to southern Alabama instead.
[00:23:03] But, yeah, it's – when you start getting an increase in the probability events, and this is where the whole, you know, one in 100, one in 1,000 year calculations, come up, those are the calculations the insurance companies are making. And the basic story is they know that, you know, one in 100 years is going to occur. So they set it up so they'll lose money in the one in 100, but they can make profit in the other 99 years.
[00:23:29] But if you then have a one in 100 year event becoming a one in 10 year event or one in five year event, that just means you look at the sums and you simply cannot get people to pay sufficient to cover. You've got to increase the premiums. They become unaffordable. People decide they won't take them out and the company collapses. But also the properties you've got can no longer be insured against flood damage and so on. And so if you end up being the buyer of a property where you can't get – when insurance is too expensive, the flood comes in and you're wiped out.
[00:23:58] And so the role of insurance companies in spreading that episodic risk breaks down if there's an increase in systemic risk. And we're seeing that on a global scale with global warming. Well, you see, the argument would be that because the insurance companies weren't insuring those areas, people weren't building those areas.
[00:24:17] I saw a brilliant one from – I think he might have been described as right wing American commentator saying, you know, all these people saying that global warming is going to mean you can't – you know, people are going to be trapped in their properties on the Coast of Florida. They can always sell them. Yeah, sure. Who's going to buy a house that is literally underwater? It's amazing people's capacity to come up with bullshit, to hang on to a paradigm. Scuba divers. Yeah, but yeah.
[00:24:46] They might like it. Sorry? Scuba divers might. They're the only people. The scuba divers, yeah, well, that makes sense. Yeah. Get up in the morning and scuba dive from your living room. There you go. But yeah, but generally. But I mean – but the argument is that, as I said, that, you know, the insurance industry will help manage all of this.
[00:25:07] Because if a property is uninsurable because the insurance industry has identified the risk from climate change for that property, then you won't be able to get insurance for that property. So you won't buy – no one will buy it in the first place and a builder won't build it there. So it already exists. This is our issue. It's the existing infrastructure and whether that can be sustained given global warming.
[00:25:30] And, you know, obviously if you got – did you see that there was a tornado that cut through St. Louis recently and just tore off the top story of a skyscraper?
[00:25:43] Now, when that sort of stuff starts happening and then increase the odds of it occurring and the levels of damage become potentially catastrophic and may just, you know, make it impossible to make a profit out of insurance in that city, then suddenly if you want to build a building, you're required to take out insurance. And you can't. And so the first – But doesn't that mean that building doesn't get – I mean, I take your point. But buildings already exist. What about buildings that already exist? Yeah, buildings that already exist.
[00:26:12] But moving forwards because we've got a, you know, a growing population. Where's everybody going to live? Well, surely the insurance industry has got a point that they are going to help determine whether that, you know, that buildings happen only in low-risk areas because they're not going to insure it. You suddenly can no longer tell what's a low-risk area. That's why I mentioned St. Louis. I don't think there's ever been a tornado going through downtown St. Louis in history.
[00:26:35] The floods in New South Wales, I mean, we're both having had our attachment to New South Wales and Sydney in particular. Those floods in the northern regions were described as one-in-500-year floods, but they had three or four in the previous eight years, which were one in 100.
[00:26:52] So you're getting to the point where you simply can't say which regions are going to be feasible to be able to get insurance because the risk is going to be so dramatically more widely spread with the levels of storms, temperature, et cetera, et cetera. You're going to have to have non-insured businesses, non-insured houses. We've got a lot of uninsured businesses as it works out. I'm trying to see where the figure is. Yeah.
[00:27:24] The Deloitte report, the 2025 Global Insurance Outlook. I'm sure you've read it, Steve. Of course. You've got to get your hands on a copy. They reckon that uninsurance, the uninsurance gap is 32% in the United States. So, you know. 32% of people who should have insurance do not. Yeah. It's 75% in Europe, 92% in Asia, 97% in the Middle East. So the insurance industry, not particularly big in the Middle East.
[00:27:53] It's fair to say. Whereas in the United States, it's there making money. But still a lot of people who are not insured. And you imagine that that is just going to increase as premiums go up. Because, of course, that's how the insurance companies will respond. Because we know, legitimately, they are quite bold and open about it. When you say, why has my insurance premium gone up so much? And they said, because we had a lot of claims last year. Well, okay. Not for me. That's the whole idea. But it doesn't. Yeah.
[00:28:23] This is why, you know, having trashed insurance companies in the first, particularly marshmallow. Oh, my God. Now it's... So we're fine to that point, by the way. Just, yeah. Just work out your algorithms. It could have been a lot easier if you'd just actually given me a £500 refund so that I didn't have to go and buy something. But anyway, insurance, I expect insurance to be the first canary in the coal mine over global warming.
[00:28:49] And imagine a insurance company is looking at the impact this has on their bottom line. It wipes it out. If you start having more and more systemic events, you know, where one in a hundred floods become one in five-year floods, then you are simply going to... You can't charge enough to get the revenue in. The costs when you do pay it are going to be enormous.
[00:29:10] They are the first line of companies which should be saying the impact of global warming is far worse than we were led to believe by economists. And that's what I'm... You know, I'm hoping that they're the ones who are going to say we have to take this nonsense on and change direction. But, I mean, the odds are it may be insurance companies end up going the way of the dodo because they're not willing to change their business model
[00:29:35] or not willing to confront the systemic understating of the systemic risk we face. Yeah. Well, but they... Of course, they will just keep on charging higher premiums. And there will be areas which are more susceptible to the influence of climate change, you know, close to the coast, low-lying areas, and they just won't insure those areas. So they'll push up the premiums and leave a lot of areas uninsured. They'll still...
[00:30:02] You know, they're still making pretty good margins, as we've said, you know, close to 25% in some years. That's pretty huge, but it's still... They can lose a lot of that and still be in business. Yeah, but if you start having a flood that wipes out a whole state in the United States or, you know, wet-bulb catastrophes that have similar levels of damage, then it's just like that, you know, the example I gave of the Australian stock market, you know,
[00:30:26] it rose by 80% between 1980 and 1987 and fell by 25% in one day. Now, you're doing very well until the 25% day. It's the sudden impact of a huge shock, and suddenly you look at it, and if you're going to meet the, you know, the claims you can't disallow, then you go bankrupt. So, Tim, I'm just hoping insurance companies start looking at the...
[00:30:52] All the research I've done, for starters, with Carbon Tracker and look at that report and just see that it has implications not just for the pension industries but for insurance specifically. And unless we drastically change direction, insurance will no longer be a viable business. So if you get 2.5% of GDP, oh, we lose it. You know, it's not a loss in the same sense of losing 2.5% GDP coming from steel output, for example.
[00:31:21] But what it means is all these industries, all these professionals making a very good living out of insurance suddenly end up being in a devastated business. So, you know, I'm just... It hasn't happened yet, but I hope insurance companies get in touch with me and say, how the hell can we fight this stuff? Because it's the increase in systemic risk that's making their businesses non-viable, and they're on the very front line of that.
[00:31:48] So if they came to you and said, well, what do we do, Steve? What would you say? I'd be saying political lobbying. I mean, a huge part of this nonsense lack of action we've taken is because fossil fuel companies have used the bullshit. That's a technical term, by the way. The bullshit published by mainstream economists that trivialises the dangers of climate change. They've happily used that to continue pumping oil out of the ground. And that applies to the state enterprises involved in it as well as the private ones.
[00:32:17] But insurance companies, again, 2.5% of GDP, it's not trivial. That's something comparable to the scale of the fossil fuel industry itself. They could be saying, we want real action here, and we want to expose what the fossil fuel companies are using to prevent real action is based on research that you should not even use as an adjunct to your activities in the bathroom. It's that bad.
[00:32:44] So the stuff that got published, got a bloody Nobel Prize for Nordhaus, all this sort of stuff, this has real consequences for real businesses. And the first businesses on the line are the insurance companies. So I'm happy to give out my number, you know, get hold. So you think the insurance industry actually could be... It could play a role. ...the force that has the biggest influence because they've got the most to lose? They've got the most to lose. They're people, you know, the wealthy individuals, wealthy institutions, Lloyds.
[00:33:13] Of course, you know, being at one stage being made a Lloyds map was both a privilege and a recipe for never-ending income. All this sort of stuff's going to go. So if you're wealthy courtesy of your holdings of insurance companies or working as a lawyer for them, for Christ's sake, get in touch with me because the estimates you're making on the systemic risks are completely distorted
[00:33:41] by the garbage published by neoclassical economists, which not being experts in economic theory, mainstream insurance companies and lawyers have accepted. It's all garbage and if anybody's going to suffer from that in the very first instance, it's going to be the people owning insurance companies all working for them. So if insurance was provided by the government rather than by the private sector, there was some sort of hybrid approach.
[00:34:08] And, you know, I used to work for the British government. I worked for the British Tourist Authority for many years. A lot of trouble involved in that. We could never take out insurance. It just wasn't allowed because we worked for the government. So the government was its own insurance. So if there was a price to be paid, the government would say, well, why should we pay premiums when we can just pay out ourselves because we are such a significant amount of money? We are our own insurance scheme, in effect, by the sheer size, which makes a great deal of sense. Can't understand why many governments in other parts of the world do take out insurance policies.
[00:34:38] And you're thinking, well, why? Because they don't understand government finances. Well, maybe, but yeah. But in any case, even if you didn't, you just think, well, just put those premiums to one side if you want to and just create a fund and invest it, which is what insurance companies do, and then, you know, pay out when you have to. There you are. You've got a government-owned insurance company. That's not a solution to this problem, though. No, it's not. And actually, my question is going to be, but if the government did take over all insurance
[00:35:06] and you didn't have this private sector insurance, could that canary in the coal mine sort of disappear, or could its influence wane? Because it would just be the government making the call rather than these very wealthy individuals. What I'd see coming out of that is, you know, rising insurance premiums leading to governments, like, you know, Starmer and Reeves deciding to, you know, cut back on winter fuel allowances and things like that that they'd never do without provocation, of course.
[00:35:34] But, you know, governments would end up trying to balance, you know, reduce their deficit and under-supply other things, making the absence of worthwhile insurance even worse. So I don't see that as a solution to this issue. Yeah. But not for this issue. They have a role to play, as they have in health, in providing insurability for those people who can't afford it. Because there's massive under-insurance, particularly in lower-income households. So you've got to protect those people. So there needs to be some sort of hybrid model,
[00:36:04] which is different to what you're talking about. So how quickly? When do you think that insurance companies will start to squeal? Because they, even with all these outside, even with these, you think, this decade, because they're still making these healthy margins. I know, I know. But the margins will collapse when you start getting, you know, systemic climate events, not just episodic weather events, but systemic climate events. And, you know, you can't pick where it's going to happen first.
[00:36:30] Just, I'm still, if I had my bets on where we're going to see a crisis that wakes people, WTFU, which you know are the initial stand for, don't you? I won't repeat them. It's saying what the fuck, wake the fuck up is rude on podcast. So WTFU. I'm not going to say it. He says it and then instantly goes on to say it. No, I can't. Sorry, YouTube. You've got to play with the medium, mate. But, yeah, Texas is my odds-on favourite for something catastrophic happening,
[00:36:57] which is a wake-up call because Texas is isolated from the rest of the American energy grid. It has high humidity as well as high heat. You have areas which are very dry, which can have a series of droughts that could extend. You've got areas that are susceptible to cyclones and massive flooding. So a combination of a cyclonic event, which enormous amounts of rain is dumped, wipes out parts of the infrastructure, the power system goes down, and people are stuck six or more hours
[00:37:26] in wet bulb temperatures over 29 degrees. The most recent research has dropped the wet bulb temperature estimate that it leads to death within six hours from 35 degrees, which is 35 degrees and 100% humidity. It might be, say, 50 degrees and zero humidity across that line. We used to think that was the deadline. Now it appears to be 29 degrees, which is much more achievable, of course. So, you know, if that happens in Texas, then we might get the wake-up call. But then when that happens,
[00:37:56] the insurance payout to Texas will be impossible. So at that point, insurance companies could wake up and realise they've been conned. So, you know, I'm a pessimist on this front. I'm not an expert on climate change, but I've read sufficient of the literature and I know, you know, I'm on speaking terms with quite a number of the leading climate scientists and picking up their vibe and their fears. 2025 was the year they started to say, this could be the holy shit year.
[00:38:25] So the upshot of all of that is that the insurance industry becomes untenable. So you do have, you have to, the provision of insurance has to be, we have to rely on the government to do that. Or we're just uninsured. That's going to happen to the finance system as well because when you start getting catastrophes that wipe out the possibility of housing in places like Florida, then you are not going to have,
[00:38:55] the private banks are going to find that all the people who can't get insurance and the insurance will be there to help them pay their mortgage when the house gets wiped out or destroyed by a flood or whatever else, they will then find that they have bad debts which can't be met and they'll start falling over. So in that sense, the canary in the coal mine for climate change will be the finance sector and the leading, the beak of the bird is going to be the insurance industry.
[00:39:24] I've run out of, Analogies, there we are. I've done my analogies for the morning. Except for marshmallows. I've got to work marshmallows in somehow. Yeah, well, maybe there's a marshmallow just sitting on the beak. There you go. It's just stuck on the beak of the bird. Tripping off, yeah. And I've experienced the collapse of the marshmallow from my own experience. I don't know. You've got to show us, can you? Marshmallow. Get your miles worth. You could save an average of 220 quid, yada, yada, yada, marshmallows. By moving from them.
[00:39:55] Yeah. Honestly. All right. Very good. I think we've given enough of a hard time. And look, you know, I'm surprised you're speaking up for the insurance industry in some ways because we need it because it's that canary. It is. Always uplifting talking to you, Steve. There you go. Yeah. Marshmallow has rose the tone dramatically. I'll try and have a good day. I'll catch you again next week. Thanks. Okay, mate. See you. The Debunking Economics Podcast. If you've enjoyed listening to Debunking Economics,
[00:40:24] even if you haven't, you might also enjoy The Y Curve. Each week, Roger Hearing and I talk to a guest about a topic that is very much in the news that week. It's lively. It's fun. It's informative. What more could you want? So search The Y Curve in your favourite podcast app or go to ycurve.com to listen. Thank you.