Is Insurance Betting on a Green Future?

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.'

‘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.green_solutions__288x200

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.

chicago+riverwalk+flooded+4+thumb 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.


Nefarious Nets: Private Insurance in the Public Sector?

At the end of the day, the insurance industry is a business. But they are also a risk pool. So while they may be companies with stockholders and CEOs with a bottom line, they are still risk shares that are meant  to minimize damage impacts amongst their insured customers. But as the insurance industry becomes savvier with personalized data about who to insure and how much to charge them – customers should ask themselves whether they can really trust their insurance company to be less of a capitalizing business and more of a safety net against damage.


As climate change damages rise, big insurance companies have begun to calculate risk costs with extreme weather events in mind. This calculation development has put insurers like Munich Re and Willis Re on the forefront of early action planning and early risk warning conversations at COP23. These two insurance companies are currently in partnership with InsuResilience. InsuResilience is a recently launched UN initiative that operates as a financial mechanism to buoy those who are vulnerable to climate change.

As a financial mechanism, InsuResilience will operate as a climate risk insurance provider to vulnerable people groups. This could occur directly with smallholder farmers or governments themselves. They have multiple programs and insurance plans that can provide service for small countries or service for small farmers. InsuResilience says that their plans will have the means to provide for “rapid emergency assistance and reconstruction, as it can very quickly disburse cash to the insured party.” The website claims that they will provide an effective and proactive approach to extreme weather events compared to the reactive measures taken by humanitarian charity efforts. Their unique position to act quickly could “save lives, protect[] livelihoods and assets, and safeguard[] development gains.”

As it affects developing countries and their campaign to receive compensation for climate change loss and damages, InsuResilience is a boon. InsuResilience allows developing and vulnerable countries to minimize the detrimental effects of climate change. In that way, InsuResilience follows a basic risk pooling example as countries pool their resources to protect and rebuild after an extreme event. For example, Cook Islands, Marshall Islands, Tonga, Samoa, and Vanuatu have pooled their resources into the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) Insurance. PCRAFI proved itself to be a successful program when Tropical Cyclone Pam hit Vanuatu in 2015. Because of PCRAFI, Vanuatu was able to receive a US$1.9 million cash pay out. Vanuatu received its funds within one week of Tropical Cyclone Pam and Vanuatu was able to use those funds to support their recovery process by mobilizing nurses into the affected provinces. 150316073014-01-cyclone-pam-0316-super-169PCRAFI is just one of the regional programs that InsuResilience supports. InsuResilience works with African Risk Capacity (ARC), Global Index Insurance Facility (GIIF), India, Caribbean Catastrophe Risk Insurance Facility (CCRIF), and more. 2cb97666-2c50-4fb7-a0c4-d0dfade57163But PCRAFI is also being “complemented by reinsurance provided by Sompo Japan Nipponkoa Insurance, Mitsui Sumitomo Insurance, Tokio Marine & Nichido Fire Insurance, Swiss Re, and Munich Re.” PCRAFI is not unique in that its funds are being complemented by private insurers. Granted, this position is not unique – but private insurers are taking a larger role in Climate Change than just reinsurance.

So while PCRAFI, its counterparts, and InsuResilience are providing vulnerable people groups safety nets against the financial costs of climate change damages – it is still being funding by private insurers. While private insurers are not inherently “nefarious”, the capitalist goals behind their operation provide a shadow of whether developing countries can trust these insurance companies to be less of a capitalizing business and more of a safety net against climate change damage.



React Slow, Lose More

To truly relieve climate change damage in the future, status quo relief measures must change. On Monday, November 13, 2017, the START Network hosted an event to precisely describe how to do so. In the “Risk Informed Early Warning & Early Action for Less L&D in Drought Contexts and Forest Fires,” speakers Michael Kühn, Matthias Ahmling, and Emily Montier discuss parametric insurance measures and full paradigm shifts on how we approach loss and damage. (Parametric insurance is different from traditional insurance measures in that the pay out occurs through a triggering event. Traditional insurance measures pay out once damage assessments of the triggering event occur.)

Climate change damage will continue to worsen as climate change induced extreme weather events (like hurricanes) occur with more and more frequency. Today, approximately 27 billion dollars are spent to alleviate climate damage in vulnerable countries. As damages increase, humanitarian charity will likely stagnate and be unable to provide help to the needy. To prevent this, fundraising for humanitarian aid must shift from being a reactive measure to a proactive measure.

Reactive measures occur when extreme weather events provoke humanitarian giving. Rather than wait for extreme weather events, proactive measures provide means to immediately react to climate change damage. This is accomplished through risk sharing pools or insurance schemes. This is beneficial because vulnerable countries no longer have to wait for funds to be raised to receive aid. An example of this action is the NGO, START Network, which provides aid through its pooled funds.

The START Network is a collaborative NGO made up of “42 national and international aid agencies from five continents.” They aim to “deliver effective aid” by “harnessing the power and knowledge of the network to make faster and better decisions to help people affected by crises.” Their mission statement highlights their commitment to early action measures. (Early action measures are those taken using pools of money prepared in advance of climate change damages – which are gathered via proactive measures). As climate change causes more predictable extreme weather events, the international community should look to loss and damage aid and compensation through a proactive rather than reactive lens.