Why it is Right to Insure Against Effects of Climate Change

Temperatures are rising, commitments by large corporations to reduce CO₂ emissions are falling, and the efforts actually being made by major countries against climate change are consistently low. The result: average temperatures rise, natural systems are stressed, and economic productivity falls. The situation and relevance of global insurance mechanisms is examined with a mixed public-private project perspective.

The latest on climate change: signs of rising average global temperatures are multiplying. One of the most striking of them has to do with rising average temperatures in the oceans, where record levels of average surface temperatures have been recorded for more than a year. The most notable impacts relate to the risk of coral extinction and the prolonged Atlantic hurricane season. The other is summarized by the strong increase in rainfall in the United Kingdom, which reached a record since registering began in 1836. According to scientists, these are phenomena associated with rising temperatures: in 2023, the world crossed a critical threshold of 1.5 degrees above pre-industrial levels, which the Paris Agreement set as a threshold that cannot be exceeded to prevent the worst effects of climate change.

Rational response to data: scientists, however, do not interpret data unambiguously. Some argue that there are no long-term trends of increasing extreme weather events. There is no complete unambiguity even in public opinion, although, at least in the US, according to the report “Climate Change in the American Mind. Beliefs and Attitudes” for autumn 2023, published periodically by Yale University, 5 times more people believe in climate change than those who believe climate change does not exist, and 58% of Americans believe climate change is caused by humanity. Does the opinion of experts matter more than the opinion of the community? Not according to analyses that show how popular opinion can surpass experts in solving even the most complex problems. But even if we recognized the lack of unanimity and therefore, technically speaking, were under conditions of uncertainty rather than risk, rationality would suggest moving to avoid worst-case scenarios, with a very conservative attitude toward greenhouse gas emissions. But there is another way to respond rationally, and that is to implement adaptation strategies along with prevention. Among other things, the costs of adaptation cannot be much lower than the costs of prevention, just think of the infrastructure that various countries around the world have built along coasts and on rivers based on thousands of years of development.

National commitments: the major countries of the world make very limited commitments compared to the complexity of the task, perhaps precisely because of the difficulty. Economists have coined the term “desperation” to refer to people who are not actively looking for a job given the very low probability of finding one. The modern equivalent seems to be the situation of the “frustrated politician,” faced with the challenge of reducing CO₂ emissions. Topics of global income redistribution intersect with topics of real change in economic structure, and ultimately many expect a “technological miracle” to solve the problem. A miracle never seen before. After all, if public opinion is insensitive to the threat, why should politicians get involved? Despite the fear of climate change, how many of us are willing to stay home in the cold or walk on foot to reduce our CO₂ emissions? How many of us have enthusiastically read the first European proposal for “greenhouse homes,” thinking about the costs required to make our real estate stock (a quarter of which is buildings raised before 1946 and 15% before 1919, according to the Italian state statistics agency ISTAT) more energy efficient?

Corporate and financial institutions: corporate and financial institutions also seem to be disappointed, especially in light of recent evidence that “succeeding by succeeding,” i.e. making profits and participating environmentally and socially, is more difficult than initially hoped. This apparently harsh judgment stems from bombastic statements made after the Glasgow 2021 COP 26 summit, in which Mark Carney said that the private sector would spend $130 trillion (1.3 times the value of the world’s gross domestic product) at the so-called Glasgow Financial Alliance for Net Zero conference. Again, according to the Financial Times, a quarter of companies that have joined the Business Ambition to 1.5°C campaign have never presented a credible commitment program to achieve net zero.

Economic implications: as happens with a body launched into space (where no one will hear you scream, as the famous movie claims), this trend continues with no friction present. In the absence of action, insurance premiums for climate-related damages continue to rise in the United States, for example, for properties located on coasts where projections of average water level rise are greatest. In fact, it’s not surprising that in areas where the public believes in climate change, real estate prices, all other things being equal, are about 10% lower. According to the Financial Times (“The uninsured world: what climate change is costing homeowners,” Ian Smith, Attracta Mooney, and Aime Williams, February 13, 2024), the world’s ten largest environmental disasters involving extreme event situations since 1970 have resulted in damages quantified in a range from $53.9 billion (in 2022 prices) for floods in China to over $187 billion for Hurricane Katrina, with an average cost of $80 billion. Is this an Earth that really can’t be insured anymore?

Conclusions: the fact that the average size of the worst catastrophe is 0.08% of global GDP probably explains the lack of real measures from an economic point of view. GDP per capita in Italy is less than 40,000 euros. Are we willing to change our lifestyles for the potential damage of 32 euros? The consequences are currently easy to manage at the aggregate level, although they can be devastating at the local level, especially in low-income countries and in the absence of a real international insurance mechanism. Perhaps, this is the reform that should be pursued: the creation of a global insurance market of public and private nature to move resources and mitigate local damage. It’s not going to be easy either: to be insured you have to pay first, and to be affordable you have to have a clear understanding of the risk, and that element seems to be missing at the moment. It’s not a problem if no one in space can hear our screams, since most of us don’t scream at all.