Is there such thing as climate insurance?
/Late last month, this article in the New York Times (originally published in May) was recirculated by some popular blogs that generally never touch insurance (Boing Boing and Slashdot). (The article was also covered by more specialized blogs at the time of its release.)
Looking at the Boing Boing article in particular I noticed a phrase that has become a become a pet peeve of mine - "climate change insurance" which Boing Boing says "costs big bucks."
The reason I blanche at that phrase is that:
- "Climate change insurance" does not (really) exist; but, nevertheless,
- People refer to it all the time.
The first claim I discuss in depth in my dissertation. It's also something that my colleagues at GlobalAgRisk have published on.
For the sake of brevity, I'll just say that the nature of climate change risk (which is distinct from the climate risk described by teleconnections like ENSO) makes it very difficult to reinsure or even put on a market.
First, changes in global surface temperature play out over decades or centuries, while reinsurance contracts are generally year to year (or in the case of cat bonds may stretch out to a few years). That makes it ill-suited to insurance markets, which demand huge premiums for trying up large pots of capital over a long time horizon.
Second, climate change is not a truly random process in the same way that say, earthquakes are. The upward drift in global surface temperatures looks increasingly certain and certain outcomes can't be insured - no one will sell life insurance to a man on death row. So, while you can insure against extremes in the weather systems impacted by climate change, climate change in its most basic form is "classically insurable" .
Finally, climate change still has poorly defined regional impacts. That makes it very difficult to translate into the types of real risks that motivate companies and individual to insure themselves. While there may be some exceptions (like at the Poles) to the extent we understand regional impacts of climate change, those impacts are filtered through the kinds of teleconnections I discuss in my dissertation.
For all those reasons, there is (as far as I know) no large reinsurer actually offering "climate change insurance". And yet, the phase, and the idea of insurance against global temperature rise, remain in circulation. At GlobalAgRisk, my colleagues and I saw/heard it repeatedly used by experts in the field of international development as well as by academic economists.
Perhaps I can interest those eager insurance purchasers in some killer robot coverage.
