Can I get insurance against ‘climate change’?

Judith Curry’s Climate etc website the other day pointed her readers towards a New York Times piece by a well-known economist about ‘climate change and insurance’, the gist of which was that we need to improve insurance because of the low likelihood that we will be able to deal with global warming through international treaties or through mitigation.

In short, we need to worry about the potential for greater-than-expected disasters, especially those that concentrate their fury on specific places or circumstances, many of which we cannot now predict.

That’s why global warming needs to be addressed by the private institutions of risk management, such as insurance and securitization. They have deep experience in smoothing out disasters’ effects by sharing them among large numbers of people. The people or entities that are hit hardest are helped by those less badly damaged.

Let’s leave aside the potential disaster stuff, and focus on  the business of insuring ourselves against  some kind of ‘climate change’. The Productivity Commission produced a report on adaptation and said this: Insurance is generally only offered if the insurer can reasonably estimate the probability of a loss, there is a degree of randomness or chance, the risk can be diversified by the insurer (by offsetting it against unrelated risks faced by other policyholders), and the policyholder is willing to pay the premium charged.

I kept this in mind as I went off with Navigator Google to unearth a company that was in that line of business. It has proved hard to find, though I haven’t quite given up. There seem to be a few problems.

First, are we talking of ‘risk’ or ‘uncertainty’? What is the real risk of a 4-degree increase in global temperature by 2100, and who will bear what losses? Here we are in the world of uncertainty, not of risk. No insurer, I think, can ‘reasonably estimate’ these probabilities.

Second, are we talking about ‘weather’ or ‘climate’? Anyone can insure their house, or their business, or their sporting event, against a variety of risks from weather events. When do these become instances of ‘climate change’? Would I have to show that this weather event, whatever it was, had been produced by the burning of fossil fuels?

Third, what is ‘climate’ anyway? Conventionally, it is the average of thirty years of weather, but that is a convention used mostly because we don’t have very much good data about weather anyway. We have fifty or so years of it, more or less, depending on the area. As regular frequenters of global temperature datasets know, there is no standard period, though 1961-1990 is a common baseline. What’s wrong with a century? We have pretty good data about some aspects of climate in Australia from the early 20th century, and those data show considerable variation over time. That climate changes is a truism.

Fourth, insurance companies already do factor in weather and the possibility of more extreme weather in the future into their calculations about premiums and payouts, or at least so I read.

Fifth, most of the scary stuff is about global catastrophes of one kind or another — rising sea levels that swamp coastal cities, giant storms that destroy large conurbations, heatwave-fuelled epidemics that carry off whole populations. If we’re trying to insure against being effected by such events, who and where are the others who will help in ‘smoothing out disasters’ effects’ by sharing them among large numbers of people’?

Incidentally, at the bizarre end of the insurance market you can buy insurance against being abducted by aliens. I thought this was fanciful, but no: (edited from Wikipedia‘s entry on ‘Alien Abduction Insurance’)

A policy normally costs around $150 per $1.5 million in coverage as of 1998. Policy offerings vary from $10,000 to $10 million. Some companies offer policies for alien pregnancy, alien examinations and death caused by aliens.

The very first company to offer UFO abduction insurance was the St. Lawrence Agency in Altamonte Springs, Florida. The company says that it has paid out at least two claims. The company pays the claimant $1 per year until their death or for 1 million years, whichever comes first. Over 20,000 people have purchased the insurance. The insurance is normally purchased by the “feeble-minded”, according to a former Lloyd’s of London underwriter. Prominent policyholders have included Shirley MacLaine and a Harvard University professor who has written on aliens.

We already carry the risk for the people who built on the Brisbane River floodplain and were flooded a few years ago, and also for those burned out in fires. My own view is that governments at various levels  bear the responsibility for allowing people to build houses in areas where flood or bushfire (or both) are obvious hazards — but then of course they pass the responsibility on to us through the taxation system.

And these problems that I mentioned above are among the reasons that the orthodox want to deal with ‘climate change’ through global treaties and ‘decarbonising’ economies. My tour around the insurance world has made me think that what we have for weather will do quite well, and the Productivity Commission seems to think so too: Overall, there appear to be few barriers to the Australian insurance market facilitating effective adaptation to climate change.

As long as we are talking about ‘weather’.

 

 

 

 

 

 

Join the discussion 4 Comments

  • David says:

    This is a very interesting post Don.

    So you ask “First, are we talking of ‘risk’ or ‘uncertainty’?”

    I think the answer is risk. Actuaries deal in mathematical probabilities. That’s exactly why insurance policies will always have a list of exemptions; civil war etc. Those exemptions are for uncertainties. The insurance firm cannot reliably estimate a premium for those possibilities, so they exempt them from their commercial insurance products.

    For example, commercial insurance firms don’t offer insurance against the possibility of invasion. Instead, as a national we collectively deal with this uncertainty by maintaining an army.

    So I think this will be the rationale behind Nordhaus’s argument against insurance for climate change.

  • Mike O'Ceirin says:

    Hi Don I was thinking of starting an insurance company. I will insure any house in Canberra against sea level rise for a premium of $1000 per year. Policy will expire on my death. Your post explains the exclusion of nuclear war in a house policy I read.

  • DaveW says:

    I read the NYT story twice, but I give up. I had a couple of thoughts, none very constructive. But, if people are so credulous, perhaps this would be a good time to start selling Godzilla insurance? I’m pretty sure that I have a good handle on the risk and uncertainty and would be willing to take them on without the help of a consortium, assuming government regulations and taxes aren’t too onerous. On the other hand, I’d steer away from anything to do with insuring against the refrain in ‘Game of Thrones’. Winter may indeed be coming.

  • David says:

    http://download.springer.com/static/pdf/350/chp%253A10.1007%252F978-94-007-1433-5_13.pdf?auth66=1401498033_3b5d58a86667b81361922eaa56a77892&ext=.pdf

    Don,

    I think you may find this quite an interesting link. I have not read it yet. So I am not sure what its conclusions are.

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