February was a crazy travel month. I packed trips to Casablanca, DC, Tahoe, London, and Venice (and not to mention the airports of Chicago, New York, Paris, Brussels, and Frankfurt) into the span of 31 Jan to 2 March.
Lately, I’ve been thinking about insurance and risk. It’s funny when things you’ve worked on a while ago and since discarded pop back into your life. Three and a half years ago I wrote my master’s thesis on the relationship between insurance, climate change, and capital investment. Somewhat randomly I was asked to put together a short paper on this topic for New Climate Economy, where I am a Senior Programme Officer, where I’ll get the chance to show off some of the ideas that I developed.
The gist is that since insurance markets clear annually (a little bit longer for some reinsurance contracts), exposure to long-term risks (like climate change), can’t be traded with existing insurance instruments. Weather is a draw from a distribution, whereas climate is the distribution itself.
So in many regions there is an acute risk that premia will rise substantially in the future. This already happened on the East Coast of the US after Sandy. But this risk can’t be transferred, since no forward / futures markets exist for insurance.
In the end there are two reasons this is of concern: First, the lack of a market for this risk means that those holding it can’t dispose of it directly, and may be unequipped to handle it. The premia for, say, windstorm insurance for a residence could rise so substantially that it becomes unaffordable, or that this rise in prices causes a substantial hit to the home equity value.
The second concern is that a lack of pricing for this risk causes a distorted investment picture, and not only will there be no risk cover for those ultimately affected, but the absence of a signal on future risks causes even more people and property to be exposed to them.
So that’s what I’ve been doing and thinking about. À bientôt!