Downhill for All Involved
Global underwriters and insurers now risk vast losses from the climate crisis.(1)
“Recent research from Cambridge University…warns that if climate change is left unchecked, catastrophic losses on property investments from disasters like wildfires, hurricanes, and flooding will triple over the next 30 years… the resulting losses to the insurance industry could cause a global financial crisis.”(2 Forbes 2019-5-22)
Can we protect our global economy by fixing our damaged climate? Who has means and motive? Are there lessons within history?
HISTORY: In the 1750s, Benjamin Franklin and others founded a house fire insurer in Philadelphia, which raised rates on more hazardous homes, and refused to insure the riskiest.(3) In 1777, Anthony Hill swept Philadelphia chimneys for this ‘Philadelphia Contributorship’.(4) This chimney sweeping exemplifies a significant step, by fledgling American insurers, beyond merely avoiding or pooling risk, to risk reduction.
In 1893, William H. Merrill midwifed the safety-troubled electrical industry into the behemoth we know today, after the young engineer started working for insurance underwriters. They hired him to inspect electrical set-ups at the Chicago World’s Fair grounds for the Fair’s opening. Merrill, just graduated from Massachusetts Institute of Technology (MIT), proposed Underwriters Laboratories (UL) to test and certify fire safety for the insurance underwriting industry. Rejected at first, he later succeeded in convincing underwriters to start this.(5)
So ended an era of deadly, catastrophic fires that scarred USA’s young cities. For example, The Great Chicago Fire of 1871 killed about 275 people and caused $222 million dollars of damage, equivalent to $4.6 billion 2018 dollars.(6) It accompanied three other fires that week, in Peshtigo, MI, Port Huron, MI, and Urbana, IL which killed more than 2,200.(7) Today we again suffer the devastating effects of fire - not from burning houses, but from burning fossil fuels. The resulting carbon dioxide ruins the climate that our food system depends on, and for which our buildings were designed.
WHAT CAN BE DONE? The Stern Review of 2006 (8) estimates annual climate crisis containment costs to be 2% of World Gross Domestic Product (WGDP),(9) with damages thus avoided at 5% of WGDP. In 2019, WGDP totaled about $87 trillion,(10) hence annual climate crisis containment costs would near $1.74 trillion a year.
The Drawdown Review of 2020 forecasts the cost and benefits of climate preservation in two scenarios.(11) The first scenario forecasts $22.5 trillion in initial investments stopping 994 gigatons of CO2 or equivalent greenhouse gas emissions, with lifetime costs running to -$95.1 trillion and lifetime profits of $15.6 trillion. Note: Lifetime costs are negative – beyond just the direct profit to investors, more than four times the investment value would be returned to society. These reviews describe how it could be cheaper to fix rather than suffer a ruined climate; indeed, so much cheaper that, in the Drawdown analysis, it’s actually profitable.
APPROACH: Many have struggled to contain Earth’s climate crisis. But who has both the motive of understanding this climate crisis, and the means to contain it? We at risk are numerous; many have the motive which understanding provides. However most of us lack the means to preserve our climate; within the few with the means, there are fewer still understanding this climate risk and their ability to contain it.
With about $27 trillion dollars in assets,(12) do the world’s underwriters and insurers have the means to control the climate crisis? If four decades of climate crisis containment were invested in at once, at a cost of $69.6 trillion, according to the Stern Review, underwriters and insurers would need to borrow $42.6 trillion, but stand to gain from the $174 trillion in climate damage costs avoided over those forty years. And the insurance industry now has enough for the Drawdown’s first scenario’s investments.
How might this occur? A global underwriter consortium might set standards that would identify carbon-neutral or -negative provision of goods or services. Policies might then specify that to receive insurance, underwriter’s insurers and customers must only use carbon-neutral or -negative goods and services that meet that standard; while also specifying direct investment into climate protection, and out of climate destruction, by underwriters, insurers and customers. This first part mimics Underwriters Laboratories’ success, the second could adhere to Stern and Drawdown Reviews’ prescriptions.
Much can be done affordably; it costs more to suffer climate crisis than to avoid it; and the insurance industry has both means and motive to protect our climate. A corollary of ‘Don’t put all your eggs in one basket’ might be: ‘With all your eggs in one basket, protect that basket.’
1 https://www.forbes.com/sites/energyinnovation/2019/05/22/the-global-insurance-industrys-6-billion-existential-threat-coal-power, https://www.theguardian.com/environment/2019/mar/21/climate-change-could-make-insurance-too-expensive-for-ordinary-people-report
2 https://www.forbes.com/sites/energyinnovation/2019/05/22/the-global-insurance-industrys-6-billion-existential-threat-coal-power/ citing https://www.cisl.cam.ac.uk/business-action/sustainable-finance/climatewise/news/investors-and-lenders-need-better-tools-to-manage-climate-risk-to-homes-mortgages-and-assets-finds-new-research.
3 https://en.wikipedia.org/wiki/Philadelphia_Contributionship 9/14/20
4 http://www.philadelphiabuildings.org/contributionship/timeline.cfm 10/11/20
6 https://en.wikipedia.org/wiki/Great_Chicago_Fire 9/13/20
7 https://en.wikipedia.org/wiki/List_of_town_and_city_fires 9/13/20
8 https://en.wikipedia.org/wiki/Stern_Review 9/13/20
9 https://en.wikipedia.org/wiki/Stern_Review 9/13/20
11 https://www.drawdown.org/drawdown-framework/drawdown-review-2020 page 88.