Reinsurance can encourage adaptation to climate change

Some excerpts from this rather long article in Business Week, “The God Clause and the Reinsurance Industry”:

(The article we originally linked-to may have been edited slightly, and was originally at  http://www.businessweek.com/printer/magazine/the-god-clause-and-the-reinsurance-industry-09012011.html )

  • “It is wrong to say that a natural disaster destroyed something; the destruction was not nature’s fault but our own” — because we built in the wrong place, or used the wrong materials, or because our earlier actions caused the so-called ‘natural’ event to happen.
  • For example, with Hurricane Katrina: “Mangrove swamps on the Louisiana coast had been cut down and used as fertilizer, stripping away a barrier that could have sapped the storm of some of its energy. Levees were underbuilt, not overbuilt.”
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  • “Reinsurance is a product, but also a carrot in the negotiation between culture and reality; it lets societies know what habits are unsustainable.”
  • For example, “In 1888 the city of Sundsvall in Sweden, built of wood, burned to the ground. A group of reinsurers… let Sweden’s insurers know there was going to be a limit in the future on losses from wooden houses, and it was going to be low. Sweden began building with stone. “
  • Currently Swiss Re, for example, has been looking at ways “to encourage city planners to build in a way that will be insurable in the future. A study of the U.K. port of Hull looks at potential losses by 2030 under several different climate scenarios.”
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  • The world is now more connected: “given the complexity of global supply chains, it’s hard to tell exactly how much more loss will come from business interruptions elsewhere in the world. Two seemingly uncorrelated risks—an earthquake in Japan and a tech firm in Louisiana—are now related”
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  • “Adaptations [may] cost more money in the short run, but reinsurers must take the long view, and they can drag development along with them”
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  • “Reinsurers… have no incentive to mislead. Their choices on risk, with billions of dollars at stake, are necessarily aligned with the pursuit of truth. If a reinsurer is more scared of a risk than it should be, its shareholders will punish it. If it is less scared than it should be, the world, eventually, will break it.”
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  • “Catastrophes do not surprise all societies equally…. Agricultural systems in the Philippines [for example] focus on minimizing loss rather than maximizing yield. “You have a choice as to how surprised, or prepared, you are going be.

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