Irrational Economist_ Making Decisions in a Dangerous World - Erwann Michel-Kerjan [113]
The same effect could, in principle, be achieved with weather derivatives. While these derivatives are usually designed to pay out on weather events, their prices would reflect local risk. A similar local-short/national-long strategy based on derivative prices should be able to isolate the deviation of the change in local risk relative to the overall change, thus mutualizing the risk. Doing this on weather derivatives provides more focus than with house price indices; it isolates the weather risk. However, the problem with both strategies lies in the term of the contracts. To be effective in hedging global climate change, the derivative strategy needs to cover the longer-term impact on insurance risk and futures contracts.
CONCLUDING THOUGHTS ON INSURER SOLVENCY
I have argued that, while long term contracts are, in principle, capable of covering the combination of stage 1 and stage 2 risks imposed by climate change, these contracts are problematic. Probably the most severe issue is whether insurers remain solvent over long time periods. In a period of capital scarcity, the additional capital needed by insurers for stage 1, solvency risk in a long-term contract, could severely diminish insurance capacity. Ironically, insuring stage 1 risk, which does not score well against the normal criteria for insurability, could well crowd out the availability of the all-important stage 2 risk.
A lesson from health insurance might well be heeded. As insurance has become more comprehensive (e.g., inclusion of mental health, more consumer choice over providers, the ability of consumers to conceal genetic information) insurance has become more expensive and less affordable and we now have an unprecedented number of Americans uninsured. Creating “Cadillac” catastrophe coverage courts the same risk. Thus, my lesson for insurers when “making decisions in a dangerous world” is “stick to what you are good at.”
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International Social Protection in the Face of Climate Change
Developing Insurance for the Poor
JOANNE LINNEROOTH-BAYER
“A TRULY INTERNATIONAL ENDEAVOUR”
In the previous chapter, Neil Doherty discussed how insurance companies might consider the insurability of climate risk in the future. While insurance is widely used in rich countries around the world, we know that radical changes in climate would have debilitating impacts on poor countries lacking an insurance system. Does the international community of wealthy nations—in light of their emissions of greenhouse gases—have responsibility for providing security to the developing world, and especially the poor within this world, as floods, typhoons, and other extremes in weather increasingly threaten their livelihoods and lives? This chapter examines the case for an international effort aimed at providing insurance as a form of social protection against weather extremes to vulnerable individuals and governments. Insurance is especially topical in the current climate negotiations, which are expected to create substantial funding for, among other activities, adapting to climate variability and extremes affecting the developing world.
The dire effects of such variability and extremes on the poor raise age-old issues of responsibility, equity, and efficiency in designing public policy. This is especially the case as poorly regulated financial markets threaten economic livelihoods across the world economy, as food insecurity leads to political discontent, and as climate change imposes the threat of greater local environmental damage and increasingly destructive natural disasters. As the threats become global, so too does responsibility for providing security to protect against them. According to UN Under Secretary-General for Economic and Social Affairs Shu Zukang:
The responsibility for the choice and mix of policies required