Insurance, liability, and climate change adaptation


in Canada, Economics, Politics, The environment

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.

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{ 11 comments… read them below or add one }

. October 29, 2008 at 11:03 am
Sarah October 29, 2008 at 3:15 pm

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.

Milan October 29, 2008 at 3:19 pm

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.

Sarah October 29, 2008 at 6:21 pm

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…

Milan October 29, 2008 at 11:07 pm

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.

. October 30, 2008 at 2:09 am
. October 30, 2008 at 2:26 am
Dianne November 20, 2008 at 10:31 am

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.

Milan November 20, 2008 at 12:21 pm

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.

. July 16, 2009 at 11:54 am

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.

. April 16, 2012 at 11:44 am

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.

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