Thursday, August 16, 2007

Does Anyone Need Climate Change Insurance?

Should we all go out and purchase “Climate Change Insurance” –like Life and Car Insurance- to protect our beachfront properties of the inevitable if-and-when?

By: Vanessa Uy

Like the establishment of the US Environmental Protection Agency back in 1970, there -as of yet- no existing legal precedents that allow –let alone to regulate- the sale of “Climate Change Insurance” policies to the average homeowner. Or maybe a homeowners insurance policy with a proviso for climate change / global warming caused damage "payout." These are quite as rare as "hen's teeth" but in Germany, the insurance community is abuzz with activity from Munich Re paying storm damage claims. I mean average because how many of us could afford the insurance premiums of Lloyd’s of London style insurance companies that provides coverage to risk whose mathematical evaluation borders on the non-existent? Also, the existing conservative political climate in the United States could easily allow existing insurance companies to classify the negative effects resulting from climate change –like sea level rise and increased frequency of hurricanes- as “Acts of God” which almost all existing insurance companies around the world won’t settle. And finally, is it wise to use the funds generated from “Carbon Offsetting” that’s already slated to bankroll sustainable / green development programs in “poor” countries be used as funds i.e. as an ethical form of "hedge funds" to settle the damages resulting from Climate Change?

Ever since “modern” insurance companies were established, they declared that the first essential factor in insurance is that the element of gambling must not be present. Since then, insurance companies had been eliminating the “element of gambling” by making it possible –through mathematics- to make accurate and scientific calculations of the extent of the hazard, so as to charge a fair premium. This is why it is important to study all the available scientific data to properly gauge the extent of Climate Change –now and in the future. The study can also be used to gauge if the risk must be important enough to warrant insurance. To make such a venture economically viable, the insurance company must have a large number of risks –spread out geographically- so that it will not have a concentration of risks in one area. And finally, the cost of the insurance –i.e. premiums- must be within the reach of a large number of people.

A couple of leading authorities –namely Michael Schlesinger and Natalia Andronova- professors of atmospheric sciences at the University of Illinois at Urbana-Champaign says that low cost climate-change insurance could help ensure a better future. By implementing a “Carbon Tax” of five US cents per gallon of gasoline and gradually increasing the tax over the next 30 years is the optimal solution, the researchers report. “You can think of the tax as a low- cost insurance policy that protects against climate change,” said Michael Schlesinger. The policy premiums –according to Professor Schlesinger- could be used to develop alternative energy technologies. Doing a little now to mitigate long-term climate change would cost much less than doing nothing and making adjustments in the future.

Because mitigation would impose immediate costs, with any long –term benefit unknown, some scientists and policy-makers have argued that nothing should be done until the “uncertainty surrounding the climate issue” is substantially reduced. But Professor Schlesinger says:” By then, however, it may be too late to and we will have foreclosed certain options. Rather, the uncertainty is the very reason we should implement a climate policy in the near term.”

Professor Michael Schlesinger’s idea of a taxation-bankrolled Climate Change insurance is somewhat similar to a State Insurance where state funds –i.e. tax revenues- are organized for the insurance of the compensation risk. To me, this is more or less similar to Social Security insurance. Like state funds, a government controlled Climate Change insurance has the advantages of costing much less than that of private organizations because no commissions are paid to brokers or agents and the work is handled by state employees. Also, some state funds may not emphasize the prevention of losses. Finally, if the premiums collected are insufficient to pay losses, the state may have to make up the difference if permitted by law.

Despite of all the rigmarole and red tape surrounding the establishment of a Climate Change insurance, the lack of legal precedents is the greatest obstacle for providing a system to mitigate the damages that might be incurred by the effects of Climate Change / Global Warming / sea-level rise. And by increasing the tax on gasoline incrementally over the years for the next 30 years could cause an- uproar to all of the petrochemical companies around the world. But –to me at least- a binding legislation of a Climate Change insurance based on the established principles of the modern insurance company / industry is probably the best solution where conservationist and the corporate / industrial world can reach a common ground.

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