The insurance industry is now one of the many actors in the private sector that are adapting to climate change. Insurance companies like Alianz or Prudential are taking actions to adjust. These big insurance companies work with groups like ClimateWise to navigate the financial world in light of climate change. But as climate change progresses, it is still uncertain whether this big insurance money will benefit or deter environmentalists’ efforts against climate change.
Traditionally, insurance companies do not like to invest in risky business. Their business model is sustained through pooling funds, investing to grow funds, and paying out funds only when necessary. To invest and to grow, insurance companies price their clients based on their behavior. They consider what to charge clients based on how often these clients would have to be compensated. Insurance companies rely heavily on data and statistics to determine the options of their customers. For example, data has shown that most auto accidents involve young drivers. So the pricing model for teenagers is much higher than the average 25+ year old. In health insurance, smokers are charged higher rates than non-smokers.
‘It’s standard procedure. Your rates will come down after a few years in the risk pool.
From an insurance company’s perspective, this practice is merely smart business. It is simply charging the riskier clients a higher premium to compensate for the higher likelihood of a pay out. In one way, this business model looks like insurance companies penalize certain client groups due to cold studies and statistics. Conversely though, insurance companies can use their pricing model to encourage certain behaviors. Their pricing models are tiered to prefer some customers over others. This subtle encouragement can shift behaviors to reduce the risk pool.
Insurance companies like Allianz are already practicing this scheme with climate change in mind by offering their clients “Green Solutions”. Their Green Solutions model charges clients based on three main elements. The first is to facilitate and promote green technology. The second is to mitigate climate change and conserve the environment. And the third is to help customers adapt to, and protect against, increasing environmental risk. Considering Allianz’s second element, behavior that is “environmentally friendly” is seemingly financially encouraged.
Alternatively, other companies like Illinois Farmers Insurance Co. are getting involved within climate change by instigating litigation against the government. After extreme storms in 2013, sewer water flooded many of their customers. Illinois Farmers sued the “greater Chicago, Cook County, the City of Chicago and numerous other cities, towns, and villages” for the costs of its increased pay outs. Under the claims of negligent maintenance liability, failure to remedy known dangerous conditions, and takings without just compensation, Illinois Famers Insurance sued for just remedies.
Within their complaint, they cite negligent action being taken in the face of climate action. They accuse the government for failing to “implement reasonable stormwater management practices and increase stormwater capacity.” They alleged that the government knew of the city’s limitations for rainwater overflow despite knowing the consistent yearly precipitation increase. They claim that the government’s negligence on climate change adaptation resulted in higher costs to private insurers. So rather than sue polluting companies for contributing to climate change, Illinois Farmers Insurance used its litigation to bring attention to the lack of adaptation action by the government.
In their desire to reduce risk and costs, insurance companies are reacting to climate change with more speed than governments. From encouraging climate friendly behavior to discouraging negligence, it is interesting to note the ways that the insurance industry can shape the response to climate change. Because money talks, the insurance industry could be an ally for environmentalism.