The Role of Insurance in Climate Adaption

 

Tropical storms and hurricanes cause immediate and direct economic damage to communities and can also impact national economic growth for decades or more. The model that drives US climate policy has been criticized for ignoring the long-term effects of such extreme weather events. A new study suggests ways to avoid the economic fallout by promoting public health plans that are popular with Americans. It fuels a growing movement to use it as a form of climate adaptation.

“Insurance could become an important component of future climate change adaptation strategies, at least in developed countries,” writes the team of German economists behind the work. Climate adaptation aims to transform societies and prepare them for current and future climate change impacts.

climate cover

Every year, the Conference of the Parties (COP) brings together world leaders and scientists to discuss the challenges of climate change. At COP 2022, “climate risk insurance was discussed as a central instrument for adapting to climate change,” said lead author Christian Otto, an economist at the Potsdam Institute for Climate Impact Research. . Still, researchers debate how much insurance can help. In general, economies with insurance grow slower than those without insurance, Otto said. “Claims take time. Getting things back on track takes time until claims are paid. Whether insurance can actually be an effective tool was an open question for us.” ', he explained.

To find out, researchers created a simplified growth model of the US economy. This model tracked the loss of physical assets (buildings, roads, machinery, and other physical items) when increasingly destructive storms landed. This model accounts for cumulative losses from storms over time and captures the fact that communities can still recover from one storm when another strikes.

The hypothetical insurance system used in the model is a compulsory, non-profit, government-provided policy that is widely available at a flat rate. The scheme uses the average insured loss ratio (50%) from US hurricanes over the last several decades as determined by German insurer Munich Re's natural catastrophe database NatCatSERVICE.

The United States does not currently have such insurance, but the Federal Emergency Management Agency's (FEMA) National Flood Insurance Program is similar. However, the program is not compulsory and is not available to everyone.

economical cushion

In a simplified U.S. economy, losses from past annual economic growth would have been halved by effective compulsory insurance policies. The results also show that insurance can cushion future US economic growth losses despite climate change storms.

This model calculates the average annual growth rate of the economy after the storm compared to the growth rate of the economy without the storm. The research team explored the effectiveness of insurance as a climate adaptation tool by turning on and off different types of insurance caps and coverage, as well as storm frequency and intensity. In a 2°C warmer world, the proportion of direct property losses covered by insurance will need to increase to offset losses from climate change-related storms. Depending on how tropical storms play out in the changing climate, policies will need to cover between 58% and 84% of direct property losses, instead of the historical average of 50%. I have. These numbers "seem to be within reach," he said, Otto.

But insurers have their limits, Otto said. Current politics are driving us towards 2.7°C warming, according to the Climate Action Tracker. Hurricane worst-case scenario projections must cover 100% of direct asset losses to account for increased losses from climate change. "That's unrealistic," said Otto.

The study suggests that better insurance coverage could help offset losses in U.S. economic growth caused by tropical storms, but Otto says her study doesn't explain everything. Instead, they wrote, their study represents an “optimistic ceiling” for insurance for disaster relief. The authors continue to test insurance validity in other countries. They published their paper in Science Advances in January.

No one-size-fits-all solution

However, insurance is not valid in all countries. The researchers repeated their analysis using the economy of Haiti, a hurricane-prone island, where the insurance market was far less developed than in the United States.

According to the study, even if insurance covers 100% of property losses, the loss to economic growth is too great for the Haitian government to address. Insurance coverage must be combined with other measures such as improving housing standards, resilient infrastructure and community management moves. “The Haiti case highlights the importance of international climate finance,” said Otto. Aid for loss and damage, a term used to describe the impacts of climate change beyond human adaptive capacity, is one example.

"The authors believe that reducing the proportion of uninsured assets is a simple way to mitigate what they presume to be a negative impact on growth," said Francesco Lamperti, an economist at the Santana School of Advanced Studies in Pisa. "It's shown to be an effective method," he said. European Economic and Environmental Institute in Milan, Italy. Lamperti was not involved in the research.

“Otto and his co-authors have developed a model that is simple, transparent and elegant,” Lamperti said. He particularly praised the model's ability to account for the cumulative effects of multiple successive storms.

Derek Lemoyne, an environmental economist at the University of Arizona who wasn't involved in the study, agreed, but urged the researchers to go further. He considers two areas of focus considering the potential for surviving infrastructure to be less exposed after a storm and the potential for less vulnerability as new infrastructure is rebuilt. said, "I would like to emphasize that insurance can be a powerful tool for stakeholders and policy makers," said Otto. "Every 10 degrees of warming we can avoid is really harmful."

Share :