A new liability insurance for climate change

Up until quite recently, houses in Switzerland continued to be constructed in areas that were susceptible to floods, avalanches, and landslides, even as Federal survey maps, so-called ‘danger maps’, identified clearly where residential construction was risky. Along with the maps, recommendations were issued to governments in cantons and municipalities to encourage the prohibition of construction of new houses in unsafe areas. But the political decision makers at these sub-national levels had at times different priorities and the Federal recommendations were frequently ignored.

We see similar dynamics in today’s climate change policies. At the level of the United Nations, there is the Intergovernmental Panel on Climate Change (IPCC), which provides a type of ‘danger map’ by outlining the threat from climate change. There is also the United Nations Framework Convention on Climate Change (UNFCCC), which hosts the political negotiations and advises on relevant rules. But even when there is an international agreement, as there was years ago in Kyoto, the treaties carry little – if any – weight at the national level.

Insurance promotes Cooperation

These days in Switzerland, the construction of residences in unsafe areas has ceased almost completely. Why? The insurance companies have recognized that it is better for them not to insure houses that are built within areas identified as risky, according to Federal survey maps. This has put a swift end to such construction projects. The proportion of houses that are insured is high, even in cantons where such insurance is not mandatory. Commercial banks tend to refuse mortgages for non-insured houses, especially in potentially risky areas, and due to the undue risk of a complete loss also mortgage-free houses typically seek insurance coverage. It is useful to emphasize that providers of house insurance in Switzerland operate on commercial principles, even though some are, for historical reasons, publicly owned. The fact that the commercially oriented insurance companies have come to rely on the publicly provided ‘danger maps’ to decide where they want to offer house insurance is an interesting example of public-private collaboration.

How is this example applicable to the risk of losses due to climate change?

There is a lively debate among legal and scientific experts, among NGOs and insurance companies, which losses due to extreme weather can be attributed to which actors [1]. Appeals for or newly announced policies of divestment from oil, gas, and coal producers seem to appear with increasing frequency. They are based on the idea that negative consequences of climate change can (and should) be attributed to the companies extracting the raw materials that lead to climate change [2].

Accordingly, some elements of the housing insurance example could apply. Firms that are at the very beginning of the causal chain, extracting raw materials which contribute to climate change, could be compelled to take out a new form of liability insurance [3]. Relevant raw materials would include primarily fossil fuels, but other materials contributing to climate change such as limestone – which is partly converted into CO₂ during production of cement – could be considered.

The losses due to extreme weather can be attributed only approximately to man-made climate change, using estimates and confidence intervals. But predictions based on historical data, even if they are approximate, are not something unusual. We know how to work with them. The federally provided ‘danger maps’ in Switzerland, identifying areas that are risky for residential construction, are one such example. Similarly, an international institution could provide standards, based on the work of the IPCC, for attributing losses from extreme weather to man-made climate change. Such standards could be updated over time, as our methods for estimating risks and attribution improve.

A new type of liability insurance could work

Recently, we published an external page article in Die Neue Zürcher Zeitung (NZZ) outlining this idea (see also box Downloads on the right). Of course, commercial insurers are unlikely to be willing to take on the liability risks of extractive firms unless this idea is supported by the international community and the idea has a legal basis in at least a few countries; and the use of non-insured fossil fuels is stigmatized. This new type of liability insurance would earn this needed international support, since insurers would pay partial compensation for financial losses to public infrastructures as well as invest in climate related projects. The funds available for such uses could be significant, even with relatively modest premiums. The funds would be

• Pooled for compensation payments; and
• Invested in projects for climate change mitigation and adaptation.

Also here, international standards would need to be established to guide the insurance companies’ use of funds. Governments themselves, however, would not need to be directly involved in the management of such funds.