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Are we insuring our homes more than we insure the planet?

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Rowan-heuvel-unsplash
Photo house by Rowan Heuvel on Unsplash

While the recent IPCC report focused on the impacts of 1.5°C of warming, we have to face facts.

We are headed for a more extreme scenario based on current political commitments. This year the world has seen extreme cyclones in the Pacific, US and Japan, and temperature records broken in Japan, Korea, Norway, Ireland, and the African Continent. The risk of catastrophic disaster is growing inexorably higher all around the world.

However, despite these increasing climate change risks, it is clear we regulate the insurance industry’s risk management, and probably many other sectors, to a higher standard than we regulate our impact on the planet’s climate.

Many of us buy insurance for our homes, cars, dental or health care.  But how many of us are making regular payments towards ensuring that there is a habitable planet for our children and grandchildren? As greenhouse gas pollutants continue to be pumped into the atmosphere, we are also increasing the risks of the most extreme scenario – spiralling impacts that destroy life.

Unfortunately, these ‘catastrophic’ or ‘existential’ risks are not as unlikely as we might hope. In new research dubbed “hothouse earth”, scientists predict the earth is perilously close to a tipping point which could kick off a domino effect - a point of no return.

In fact, some scientists argue there is now a 1-in-20 (5%) chance that we will face risks to humanity that are worse than catastrophic by 2100. That is, is a 5% probability of warming over 5°C – a level which could wipe out humanity.

The Professor responsible for the study notedwe would never get on that plane with a one-in-20 chance of it coming down” and yet we are putting our children on that plane, with continued fossil fuel use.

Leadership by insurers: What are the odds?

Insurance experts know a lot about risk. Insurance companies have also, for many years, been sounding the alarm on climate. According to Oliver Bettis at the Institute and Faculty of Actuaries, we have a stronger regulatory system governing the insurance sector than we have on climate change.

For example, insurance companies are required to hold enough capital to have less than a 1-in-200 risk of going broke.  By contrast, companies are not currently required to deploy capital to mitigate the 1-in-20 chance of climate catastrophe.

Striking as it may seem – governments around the world are not protecting citizens from climate catastrophe anywhere near as much as they protect insurance policyholders.  If they were to apply the same level of risk tolerance, we may already have an emergency global plan to ban fossil fuels and deforestation. The levels of warming gases are already higher than what society, generally, has accepted as an acceptable level of risk to catastrophe. What people should invest in is not regulated in the same way that the insurance industry is, so it is much trickier to align the incentives.

On risk, our priorities are skewed.  The annual risk of burglary in the UK is currently 2.5% (1-in-40). That means a child born today is twice as likely to witness climate catastrophe within their lifetime than their house being broken into by a burglar this year.

Similarly, carbon monoxide monitors are installed in our homes. But how many of us have voluntary installed a smart meter to reduce fossil fuel use – which could end up being even more harmful?

If we’re not working to avoid catastrophe for the planet, what is the purpose of investing in home insurance? If humans were rational over the long term, we would probably be putting a portion of our income into preventing catastrophic climate change.

The risks of climate catastrophe are mind-boggling.  However, we should remember– including the 1-in-20 chance of a scenario that could wipe out mankind, are based on current political choices, and can still be changed.

Odds of different risks

Sources: NSC, 2018; Crime Prevention Website, 2018; Xu and Ramanathan, 2017; BMJ, 2018; HSE, 1992; HSE, 2001.

1 in 20 climate risks are for warming above 5C, a level worse than ‘catastrophic’ - which includes the risk of humanity being completely wiped out.

What is ‘catastrophic’ climate risk?

The world is already heading for around 3°C of warming based on current pledges under the Paris Agreement.

Planetary warming between 3°C and 5°C could trigger points of no return - such as the collapse of the West Antarctic Ice Sheet or dieback of the Amazon rainforest.

It is already extremely likely global coral reefs will be severely damaged. Scientists say there is now only a one-in-20 (5%) chance of staying below 2°C (in Nature) – the level needed to protect coral reefs.

Insufficient research has been done on the ‘upper end’ of extreme risks.  We know relatively little about just how bad it could get.   The recent IPCC report focused on 1.5-2°C of warming but did not cover more extreme scenarios (4°C or 5°C).

Could there be a role for the insurance sector in better explaining the existential dangers we face? Given we’re already buying insurance, why don’t we approach climate risk in the same way?  If you buy a car, you’re required to insure it.  What about paying a bit more for a zero-emission car or renewable energy to ensure the planet remains habitable? 

Insurers are already ending insurance for coal, but must do more to end insurance for other damaging fossil fuels. AXA for example, has taken the lead by stopping insuring the tar sands.

Governments and organisations must also invest more in climate action. An average American citizen spends 12% of their income on insurance. In the UK, healthcare expenditure is 9.8% of gross domestic product (GDP), with about 2% spent on defence, and 4.5% on education.  By comparison, keeping global warming below 2°C would cost just 1-4% of GDP.   A tiny amount, for what it would save. Similarly, financial regulators should regulate polluting industries in line with the huge risks their fossil investments pose.

Unfortunately, we’re not on track on climate investment which actually fell from $437bn in 2015 to $383bn in 2016, only about 0.5% of the $75.4 trillion global GDP.

If government started applying a risk management perspective to climate policy, we would be doing much more. The level of investment needed to address climate change is not trivial, but it is well within global means. Think of it as an insurance policy.