Insurance, liability, and climate change adaptation

Yesterday, I saw a fascinating presentation by Dianne Saxe: a lawyer who explained the legal liabilities that could arise as the result of climate change. The particular focus was on the government, and ways in which failure to effectively adapt to climate change could produce a legal risk. For instance, the government might be sued for failing to establish building standards that reflect our understanding that extreme weather events will get worse.

Legal liability and insurance are definitely very important elements of the climate change problem. Insurance companies probably have the most reason of anyone to get the most accurate and precise estimates about the various future impacts of climate change. In a world where mitigation does not occur rapidly enough, they will certainly find themselves with a lot of extreme new risks threatening their profitability: especially given how many of the probable impacts of climate change are included in existing property insurance. Climatic change that produces more intense windstorms is a major issue for you if you insure millions of houses and your policies include coverage for wind damage.

Arguably, the insurance industry and society-wide concerns about liability could be a good motivating force for making society more resilient to climate change. That is especially true when there is an opportunity to create price incentives: charging more (or refusing to offer coverage) for houses in hurricane zones, offering reduced premiums for houses built to withstand projected changes, and so forth. Of course, lots of ethical issues arise in connection with the governmental role. Sometimes, it is quite legitimate for government to step in and mandate that insurance be provided to a certain group, or for a reasonable price. At other times, such interventions undermine the ability of insurers to encourage sensible behaviour.

It will be a very interesting area to watch: both in terms of the commercial decisions taken by insurance companies and in relation to court cases and new precedents that arise.

Author: Milan

In the spring of 2005, I graduated from the University of British Columbia with a degree in International Relations and a general focus in the area of environmental politics. In the fall of 2005, I began reading for an M.Phil in IR at Wadham College, Oxford. Outside school, I am very interested in photography, writing, and the outdoors. I am writing this blog to keep in touch with friends and family around the world, provide a more personal view of graduate student life in Oxford, and pass on some lessons I've learned here.

15 thoughts on “Insurance, liability, and climate change adaptation”

  1. Call me cynical, but won’t insurers simply respond by making their coverage less comprehensive in order to avoid paying out for extreme weather events? They already refuse to pay for lightning on the grounds it is an ‘act of god’, so I could easily see this exclusion clause being renamed & expanded. In any case, that’s what I’d do if I were an insurer, particularly given our very limited ability to predict longterm weather patterns for local areas.

  2. In the case of risks they cannot quantify, not offering coverage would be a rational choice. The efficiency and usefulness of insurance depends on effectively pooling and pricing risk.

    That being said, insurers who prove capable of quantifying climatic risks seem likely do a lot better over the next few decades than those that cannot.

  3. Presumably the problem is the error margin of their calculations of those risks, & that error margin might be both largeish and hard to evaluate. I can see that effectively quantifying risk might be a recipe for success, but if ‘effectiveness’ can only be judged after the fact then risk-aversion would lead one to restrict coverage. Of course the discount rate between present & future benefit likely sways them in the opposite direction…

  4. One important factor is whether we see an amplification of existing risks (hurricanes in Florida, droughts in Australia) or whether entirely new effects will lead to unexpected insurance claims.

    Insurance is fundamentally predicated on being able to use the past to predict the future. As such, it may simply be a less viable industry in a changing world.

  5. One of the points of my presentation was that we, as a society, must decide how these, increasingly foreseeable risks should be borne. If we refuse to decide, the probable consequence will be that the victims will be stuck with the losses, and will try to sue whomever they can.

    I agree with Sarah: insurance companies may simply refuse to provide protection for extreme or unpredictable climate risks. And so they should, if they cannot adequately price them. Most insurance companies are private companies, in the business to make a profit by allowing us to pool certain risks. When private insurance isn’t available, or is considered inadequate, government has to decide whether to step in, e.g. the Nuclear Liability Act, OHIP, and the last resort pool for bad drivers.

    Individuals remain exposed to many losses, for which we have neither insurance nor government protection. For example, Canadian home insurance coverage rarely provides protection against flooding, earthquakes or pollution. In my experience, this is often a surprise to those affected.

  6. One of the fundamental reasons for which dealing with climate change is challenging is the mismatch between who bears the costs of mitigation and who bears the costs of climate change impacts. That is most acute in the case of future generations, who are completely vulnerable to our choices but utterly unable to harm us in any way.

    Purely on the adaptation side, it is certainly an interesting legal and ethical question who has the obligation to adapt and what constitutes a reasonable response to that obligation. If predictions about the nature of future climates become more precise, that should be an aid to some (say, insurers who cover wind damage in a particular region). Even then, climate change is likely to cause at least some events with an unexpected character or severity, too rare to be incorporated into risk models on the basis of past experience.

    Ultimately, the future of insurance will involve more and more problems withthe inductive fallacy: the faulty notion that we can use the frequency and apparent causal linkages between past events to make predictions about future ones.

  7. Insurance CEOs Call on Industry to Get Proactive About Climate Change
    by Stacy Morford – Jul 8th, 2009

    Just look at some of the recent numbers:

    * Severe flooding in central Europe in August 2002 caused damages estimated at 15 billion to 20 billion euros, about 0.7 percent of the countries’ combined GDP.

    * France’s deadly 2003 heatwave cost agriculture alone about 4 billion euros.

    * Hurricane Katrina in 2005 resulted in losses of about $125 billion, just under 1 percent of the United States’ GDP.

    * In Kenya, droughts in 1999 and 2000 racked up damage amounting to 16 percent of GDP, about a quarter of it due to hydropower loss.

    Yet, even though insurers are the masters of risk assessment, they’re still stuck in reactive mode when it comes to climate change, a group of insurance CEOs and climate experts writes in a new report from the International Association for the Study of Insurance Economics, better known as the Geneva Association.

  8. Lloyd’s of London says arctic development fraught with risk

    The Arctic is likely to attract “substantial investment” over the next 10 years, possibly up to $100 billion or more, says a new report prepared for Lloyd’s of London, the world’s leading specialist insurance company.

    But given the high-risk nature of investing in the Arctic, this figure could be significantly higher or lower.

    The “rapid and disruptive change in the Arctic environment” means the prospects for investment and economic development are uneven, says the 60-page report, called The Arctic opening: Opportunity and Risk in the High North.

    Political support for development will continue to represent an uncertainty for businesses seeking to invest in Arctic projects, the report predicts.

  9. Second, global warming is fuelling more such extremes everywhere (see article). In 2017 Houston experienced its third “500-year flood” in less than four decades, California suffered five of its 20 worst wildfires ever and parts of the Indian subcontinent were underwater for days following epic monsoon downpours. That year insurers paid out a monumental $135bn in compensation. Another $195bn in estimated losses was uninsured. Power plants often run slow because the river water they use for cooling is too hot. Last year commercial traffic along the Rhine, the world’s busiest waterway, ran aground when rains failed to replenish its sources.

  10. In some ways, the insurance industry resembles the banks and the asset managers: it controls a huge pool of money and routinely invests enormous sums in the fossil-fuel industry. Consider, though, two interesting traits that set insurance apart.

    The first is, it knows better. Insurance companies are the part of our economy that we ask to understand risk, the ones with the data to really see what is happening as the climate changes, and for decades they’ve been churning out high-quality research establishing just how bad the crisis really is. “Insurers were among the first to sound the alarm,” Elana Sulakshana, a ran campaigner who helps coördinate the Insure Our Future campaign for a consortium made up mostly of small environmental groups, told me. “As far back as the nineteen-seventies, they saw it as a risk.” In 2005, for instance, Swiss Re, the world’s largest reinsurance company, sponsored a study at the Center for Health and the Global Environment, at Harvard Medical School. The report predicted that, as storms and flooding became more common, they would “overwhelm the adaptive capacities of even developed nations” and large areas and sectors would “become uninsurable; major investments collapse; and markets crash.” As a result of cascading climate catastrophes, the day would come when “parts of developed nations would experience developing nation conditions for prolonged periods.” In April, Evan Greenberg, the C.E.O. of Chubb, the world’s largest publicly traded property and casualty insurer, said in his annual statement to shareholders that, thanks to climate change, the weather had become “almost Biblical” and that “given the long-term threat and the short-term nature of politics, the failure of policy makers to address climate change, including these issues and the costs of living in or near high-risk areas, is an existential threat.” To its credit, Chubb soon took a step that no other big U.S. insurer has managed, and announced that it was restricting insurance and investments in coal companies. But it still invests heavily in oil and gas, and so does virtually every other major insurance company.

    The second thing that makes insurance companies unique is that they don’t just provide money; they provide insurance. If you want to build a tar-sands pipeline or a coal-fired power plant or a liquefied-natural-gas export terminal, you need to get an insurance company to underwrite the plan. Otherwise, no one in his right mind would invest in it. “You can’t even survey a pipeline route without some kind of insurance,” said Ross Hammond, a senior strategist with the Sunrise Project, which began looking at the insurance industry in 2016, while fighting plans for an Australian coal mine. “If you have a crew in the field, they need to be covered, Hammond said. “They break their ankle, they’re going to sue somebody.”

  11. Moreover, structural changes in the economy, such as the move away from fossil fuels, could leave insurers’ portfolios exposed.

    Regulators are doing more to prod insurers to hold sufficient capital—typically the aim is to ensure they can withstand losses caused by the worst imaginable year in 200. But putting a figure on this is hard, because nobody has thousands of years of data. And the worst possible year is getting worse every year. The risks will keep rising long into the future, says Paul Fisher, a former supervisor at the Bank of England. A cataclysmic year could also hit markets, hurting insurers’ investments just when they need them most. Some could be forced to sell assets to cover giant payouts, pushing asset prices down further.

    A few calm quarters could see some of those increases unwound. But there is no doubt about the trend. And it cannot continue for ever without some customers rethinking whether to buy insurance at all. Insurers may seek to keep rates lower by adding exclusion clauses or capping payouts. Or regulators may set maximum premiums—which could mean some insurers quitting altogether. Swathes of the economy are likely to become uninsurable, leaving a growing number of people, firms and states exposed to catastrophic losses.

    Above all, insurers need to publicise the risks posed by climate change, and the need for cover.

  12. Parts of America are becoming uninsurable
    Blame growth in hazardous areas, climate change and bad policy

    According to state data, 85% of properties in one Santa Clarita zip code were dropped by their insurers between 2015 and 2021.
    In theory, insurance sends a risk signal. Homeowners could expect their policy to be expensive if they live in a floodplain or in a forest. It would be cheaper in places less prone to storms, wind or fire. Yet for decades distortions in federal and state insurance markets have suppressed rates, enabling a mass migration to hazardous areas. The population of Florida, which suffers more hurricanes than any other state, grew more than twice as fast as the country did between 2000 and 2020. Texas, which is vulnerable to storms that form in the Gulf of Mexico, grew even faster. By 2015, the value of insured property along the Gulf and Atlantic coasts had passed $13trn. A recent study from researchers at Stanford, the University of California in Los Angeles and the Australian National University suggests the population living in the “wildland-urban interface”, where nature meets development, doubled between 1990 and 2010, to nearly 21m people. Even more striking, the population in areas most prone to wildfires grew by 160%.

    In time, the people who can afford to stay in coastal Florida or in the foothills of the Sierras will be those who can pay the exorbitant cost of insurance that comes with an ocean view or woodland retreat. Or, if there is no coverage to be found, those who can afford not to be insured at all. What about the people who can’t afford to stay, and can’t afford to abandon their homes? Jesse Keenan, a professor of sustainable property at Tulane University in New Orleans, argues local governments need to start thinking seriously about managed retreat. “At the end of the day, people who live in super-high-risk zones are going to have to move,” he says. “And there’s going to be a lot of political bloodshed along the way.”

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