INSURANCE

A deserter in the fight against climate change?

Insurance is our coping strategy for uncertainty, a brilliant invention to shrink financial risk. But when it comes to climate change is it doing more harm than good - both facilitating the growth of fossil fuels on one side and, on the other, numbing the pain of extreme weather? And if we don’t feel the pain, we dont strive to halt the assault. This is the core of our recent Rare Earth podcast.

Let me roll back and confess a bias. I’ve always found insurance to be an irritant. In my journalistic life, original ideas of how to tell a story or access unusual locations are often blocked by utterance ‘the insurance says no’. A similar experience can hamper charitable projects: community lunch clubs blocked by insurance companies suspicion of private kitchens, fund-raising cycle rides stymied by absurd premiums. I am, by nature a trusting and optimistic person, not someone who fears the worst. Some might call this foolhardy. But too often I experience the insurance business as a drag anchor on innovation and creativity.

Many in business would see it as quite the reverse: an enabler and a force for good. Insurance can trace some roots back thousands of years but it really took off in the early days of merchant shipping. The financial risk of a wreck was spread around willing customers in Lloyds coffee house in London. It enabled them to spend a fortune on a precious cargo or a new vessel because they wouldn’t lose the lot. Paying a premium to cover losses didn’t reduce the chance of a ship sinking, just made that sinking more bearable for the owners. Insurance softened the blow for the money-men not the mariners. But there’s no doubt that it is the essential lubricant for business, smoothing spikes of the fickle fate which would otherwise sieze-up the engine of capitalism.

So, imagine my delight towards the end of the twenty tens when the insurance industry was emerging as a key ally in the fight against climate change. There was talk of insurance companies refusing coverage to new fossil fuel projects for a mixture of ethical and financial motives. The latter was the belief that internationally agreed targets set at the Paris Climate talks surely meant a new coal mine wasn’t a sensible use of money even if you didn’t care two hoots about climate change. Also, insurance companies are huge investors themselves. All those premiums don’t sit in a vault, the accumulated billions are invested in other companies, often fossil fuel companies. As the financial sector was swept by a green zeal led by former Bank of England governor Mark Carney and a group of insurers gathered under The Net-Zero Insurance Alliance partnered with the United Nations. There was talk of switching investment and coverage away from companies that make climate change worse towards companies that reduce climate change. In other words, using their power to tilt the finance playing field towards climate friendly business.

Then immediate reality bit.

The oil and gas supply squeeze driven by the invasion of Ukraine meant there was both huge demand for new supplies and vast amounts of money to pay for it. Refusal to insure looked out of step with popular sentiment and left a lucrative opportunity open to those not in the Net-Zero Alliance. At the same time lawyers from 23 US States threatened the group with legal action under anti-trust laws. The Alliance disbanded in 2024 and with it the hope for coordinated action from the insurance industry to shift the direction of the global economy towards cutting greenhouse gases. This trend was then cemented by the election of US President Donald Trump. Normal service has been resumed and insurance is greasing the wheels of big business, few bigger than oil, gas and coal.

For most householders though, the climate emergency links to insurance through fuelling more extreme and damaging weather. In America, the insurance pay outs from the recent fires in Los Angeles and hurricanes in Florida are more than $100 billion. There were widespread wildfires in Spain Portugal and Greece this summer. Floods tend to be the costly phenomena here in the UK. This drives up premiums and could make insurance unaffordable or simply unavailable.

The societal and political response is a scramble to maintain business as usual and pretend nothing should change in our settlement geography. In the UK, under a scheme called ‘FloodRe’, we keep insurance affordable for existing homes in high risk zones with subsidies from all policy holders so people carry on living there. But is this apparently kind policy obscuring a harsh reality? If a property is deemed so high risk maybe we shouldn’t be living there or asking someone else to pay for the risk. Meanwhile, we carry on building more homes on the flood plain and in the line of fire on what’s known in America as the ‘Wildland Urban Interface’ - next to the combustible scrub.

The Australian government’s independent advisors, The Productivity Commission, clearly think such pools that share the burden of high premiums are wrong. Remember, with both catastrophic floods and fires, the land down under is no stranger to extreme weather disasters. In a report to parliament last year they stated: ‘Government interventions in private insurance markets risk subsidising the movement of individuals, households, and businesses into harm’s way’ They believe actual insurance costs are the true financial signal of climate change. Mute that signal by spreading the risk you mask the growing danger. They also add that it leaves government or the wider public on the hook for a potentially huge bill and, given the forecast of more natural disasters, one that is financially unsustainable.

It is a bold, some might say harsh, idea. But if people - voters - become homeless, climate refugees within wealthy countries and settlements are abandoned, this could put real pressure on governments to wake up to the threat of a warming planet and work harder to stop it

Universal and affordable insurance sounds great, but in the midst of a climate crisis, is it lulling us into a false sense of security?