The forthcoming InsiderScope panel discussion ‘Reinsurance: survival tactics in a brutal market’ on 9 May 2017 is timely. The Insurance Industry is being hammered relentlessly by the devastating effects of manmade climate change and the resulting claims payouts. At PAL, we estimate that the percentage increase in insured loss and damage attributable to global warming is about 20%. This is increasing at about half a percent per year. By 2025 it will be an eye-watering 25%. And yet Government reacts by levying evermore punitive taxes on the very enterprise that can save it money.
Unsurprisingly, most insurers’ response is to retreat: to reduce cover and increase premiums. Whilst providing a temporary sticking plaster to staunch the cash flow, this can never treat the wound. In fact, it makes a bad situation worse: in a world where most of its population is uninsured, this response by insurers will only increase their number. Therefore governments (i.e. their tax payers) have to finance reparation for these disasters, often against a backdrop of existing economic and political crises. Again, the resulting fallout can be an economic disaster in itself.
What if we could offer reparation to the insurance industry in recognition of the losses they risk incurring as a result of climate change? They could then innovate, perhaps using micro-insurance policies to provide affordable cover to citizens across the globe – inclusive of disaster compensation. This would encourage far more people to insure, while governments would no longer have to underwrite unforeseen catastrophes, and would thus be able to plan with more confidence.
This is no ‘Pie in the Sky’ proposal. It is fully documented in PAL’s book ‘Predicting The Price Of Carbon: How to crack the climate change code for good’, by my colleague Richard Clarke, Director (Research) at PAL. It espouses not only a practical approach but also a radical rethink to tackling manmade climate change and how to mitigate its effects for the good of future generations. This model is financially sustainable and can be rolled out internationally today. It can for the blueprint for a modern perspective of our world, by: developing a science-based method which evaluates the price of carbon – which currently should be about $15-20/tonne; arguing that the global levying of this ‘carbon charge’ should be the responsibility of the World Bank; and proposing that fully 30% of this revenue should be allocated to the worldwide Insurance Industry as shown in the pie chart below.
Carbon dioxide is by far the biggest cause of climate change. By evaluating the price of carbon, a market mechanism is created. This results in a vital feedback signal that automatically corrects the hitherto widespread practice of emitting carbon for free. Richard’s book demonstrates how the price of carbon can be scientifically determined by analysing the damage attributable to manmade climate change. This is shown to be currently around $15-20/tonne CO2. The World Bank must surely be the agency for collecting this as a “carbon tax”. The revenue should then be fairly distributed by emulating, in part, the British Columbia Carbon Tax system.
Richard advocates using the resulting revenue for four realistic ‘AIMS’, whereby allocations will be directed to Adaptation (e.g. flood protection); Insurance (ensuring viability); Mitigation (e.g. solar panels, wind turbines and carbon capture) and to Social dividend (a per capita allowance, to make the tax fair across all income levels).
This remarkable, ground-breaking approach offers practical solutions, real hope and a sustainable future to a world threatened by natural disasters which are already beyond our current ability to control them. Instead of hammering the Insurance Industry with punitive taxes, we must tax CO2 emissions and pay 30% of the resultant revenue to recompense those insurers who are carrying the can for manmade climate change.