15.2.7.2 Government-Based Insurance and Disaster-Relief Systems
Government entities are vulnerable to climate change as providers of insurance
and/or disaster relief; providers of domestic and international disaster preparedness/services;
and managers of property and weather-sensitive activities.
Private insurers find certain weather-related risks to be technically uninsurable
as a result of their spatial concentration, actuarial uncertainty, and associated
difficulties in pricing. In the United States, this problem arises mostly with
respect to crop and flood risks, although government flood insurance is limited
to residential and very small commercial customers. There is ongoing tension
between government and private-sector players in the natural disaster arena,
with each looking to the other to clarify the somewhat ambiguous division of
responsibility.
In Canada, government (federal, provincial, and municipal) has paid most of
the natural disaster payments, amounting to US$15 billion (CDN$22 billion) in
disaster relief between 1982 and 1999, including 86% of flood-related losses
(Emergency Preparedness Canada, 2000). Consolidated data for U.S. government
payments for natural disasters are not readily available. One source reports
US$119 billion (1993US$) in government outlays between 1977 and 1993 (Anderson,
2000).
Government insurance programs can have difficulty achieving solvency, as exemplified
by the US$810 million deficit in the U.S. flood insurance program in the mid-1990s
(Anderson, 2000). U.S. crop and flood insurance programs have never been profitable,
and growing coastal erosion risks will require doubling of rates in the United
States (GAO, 2000; Heinz Center, 2000). Government insurance programs also have
resulted in cases of maladaptation (e.g., inducing people to settle in vulnerable
areas) (Heinz Center, 2000).
15.2.7.3 Creating and Maintaining Adaptive Capacity
Private and public insurers alike have at their disposal a variety of tools
to increase adaptive capacity. These tools can be divided into the broad categories
of risk spreading and risk reduction (see Chapter 8).
Some of these strategies involve shifting of risk between the public and private
spheres, or even back to the consumer, and in that regard have considerable
public policy ramifications that are beyond the scope of this chapter.
Given their sensitivity and potential vulnerability to weather-related losses,
North American insurers and their regulators have designed a variety of adaptation
mechanisms. These strategies include economic measures—raising premiums
or deductibles, withdrawing coverage, creating systems for pooling risks among
multiple insurers (e.g., U.S. government-mandated FAIR Plans or beach/windstorm
plans and state-mandated "guaranty funds" based on mandatory contributions of
insurers, to pay the claims of insolvent insurers)—and the use of capital
market alternatives to finance risk (see Chapter 8).
Responses also include more engineering-oriented risk-reduction strategies,
such as land-use planning, flood control, cloud seeding (see Section
15.3.2.4), and early warning systems.
Hurricane Andrew in 1992 and the 1998 ice storm (see Section
15.3.2.6) were wake-up calls for the North American insurance industry.
Among the numerous responses have been increased utilization of catastrophe
modeling, a more proactive stance toward disaster preparedness/recovery, new
efforts in land-use planning, increased attention to building codes, and increased
use of incentives to implement loss-prevention measures (Bruce et al.,
1999b).
One embedded vulnerability facing insurers and government risk managers alike
is that, by design, their actuarial outlook and disaster reserving conventions
are based on past experience. There is an emerging and encouraging trend to
forward-looking catastrophe modeling, although it has yet to integrate knowledge
from climate change modeling. Thus, under climate change, the potential for
surprise is real. Vulnerability is compounded by the potential for changes in
the frequency, variability, and/or spatial distribution of extreme weather events.
Increased uncertainties of this nature can complicate and confound insurer methods
for preparing for future events (Chichilnisky and Heal, 1998).
15.2.7.4 Equity and Sustainability Issues in Relation
to Insurance
Although North America is a wealthy region, significant equity considerations
arise from its cultural and economic diversity (Hooke, 2000). This raises important
issues concerning the design and deployment of effective natural disaster preparedness
programs (Solis et al., 1997). Lower income groups tend to live in more
vulnerable housing and are least able to afford potential increases in insurance
costs by insurers or cross-subsidies utilized to spread risks (Miller et
al., 2000). Poorer individuals also tend to carry little if any life and
health insurance and thus may be uninsured against public health risks such
as urban heat catastrophes or urban air quality risks posed by climate change
(see Chapter 9).
In some cases, sustainable development and environmental protection complement
insurance loss reduction objectives. Examples include protection or restoration
of wetland areas that increases tidal flooding defense, sustainable forest practices
that reduce risk of inland flooding and mudslides, or agricultural practices
that increase drought resistance or reduce soil erosion (see Chapters
5 and 8; Scott and Coustalin, 1995; Hamilton, 2000).
Similarly on the end-user side, a variety of energy conservation and renewable
energy measures have been found to offer insurance loss-control co-benefits
(Mills, 1996, 1999; Nutter, 1996; Mills and Knoepfel, 1997; American Insurance
Association, 1999; Vine et al., 1999). The insurance sector itself has
begun to examine its activities within the broader framework of sustainability
(Mileti, 1997; Kunreuther and Roth, 1998).
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