Insurers' historical and continuing role in creating climate risks

Insurance has a long history (Trenerry 1926) of playing a central role in facilitating the conduct and expansion of trade and other economic activity: ‘[s]hips do not sail and capital is not deployed abroad without adequate insurance protection’ (Pfeffer and Klock 1974: 272). Historians trace the beginnings of insurance’s role in facilitating trade in monetary economies as far back as c.3000 BCE in China (Fink 2011), and insurance provisions in the Code of Hammurabi from 2250 все in Babylon (Pfeffer and Klock 1974: 27). The literature on historical aspects of insurance focusses on several key themes, primarily the functions of transferring risk (e.g., Clark 1999; Melone 1964; Pfeffer and Klock 1974) and pooling risk (e.g. Kulp and Hall 1968: 10).

Shifting focus forward to the Industrial Revolution and climate change’s origin, insurance was already a long-established facilitator of economic activity and expansion. Supple (1984: 3) argues that insurance, understood as an economic and financial mechanism, is ‘directly associated with ... modernisation of economic and social arrangements, and, therefore, with the growth of the British economy from the late eighteenth century’.

Shifting perspective forward again to the contemporary period, insurance is described ‘as a business, a legal institution, a technique for averaging loss and an instrument of social planning, [with] many faces and forms, which continue to confound simple classificatory schemes’ (Denenberg 1963: 323). Contemporary Western society is deeply dependent on insurance such that insurance is considered central to modern societies and economies. Leng-wiler (2003) goes as far as to describe contemporary Western society as the ‘insurance society’, with the creation of welfare states (Harvey 2005) serving as the most comprehensive example of public policy reliance on insurance (Lengwiler 2003).

The dependence of fossil-fuel-based economic activity on insurance is evident in the sheer size of the insurance industry, the world’s largest by revenue—larger than defence, electricity generation, oil, or pharmaceutical industries (Mills 2012). Revenue earned from premiums alone amounted to USD54.7 trillion in 2016 (Swiss Re Institute 2017). In addition, insurance companies earn income from investments, which in 2009 was estimated at around USD$1 trillion (Mills 2009). In 2014, insurers held USD$29 trillion under management, including investments of third parties, which represent about one-third of global assets under management (Bosshard 2017: 8). Insurance provided through markets is complemented by social forms of insurance, including public expenditure in welfare states on health, unemployment benefits and age and disability pensions. In combination, commercial and social insurance provision has been estimated to be at least 15 per cent of the value of the global economy (Phelan et al. 2011b).

Climate change, as noted above and elsewhere (e.g., Kramer and Bradshaw, this volume, Chapter 9; Brisman, South and Walters, this volume, Chapter 10), is caused by fossil-fueldependent economic activity, and is not solely the responsibility of the insurance industry. Insurers have and continue to play a critical enabling role in the expansion of the fossil-fuel-based economic activity causing climate change and attendant climate risks (South 2015), however. As such, insurers—both historically and currently—are implicated strongly in the creation of climate change and climate risk.

Yet, as for all of humanity, the insurance industry is not immune to the impact of anthropogenic climate change. At present, insurers are able to manage financial risk in the global economy while the Earth system remains in a familiar, albeit precarious, state (Rockstrbm et al. 2009). This is because familiar stable conditions and past experience provide a reasonable guide to the future, enabling insurers to calculate and price risks (Phelan et al. 2011a). A changing climate renders the Earth system unstable and characterised by unpredictable change (Schneider 2004).

On a timescale of interest to humans and our societies, the sum of climate-change-related feedbacks in the Earth system is positive, i.e., climate change leads to feedbacks that amplify rather than dampen changes in the climate (Allen and Frame 2007; Roe and Baker 2007; for a discussion of feedback in complex systems, see Meadows 1999). Net positive feedback leads to further increases in warming that push the Earth system further away from a familiar stable state to an alternate state which, whether stable or unstable, is unfamiliar. The non-linear quality of the change means the rate of the shift is increasing continually and, in practice, observed rates of climate change are repeatedly underestimated (Phelan, Henderson-Sellers and Taplin 2010). In addition, Earth systems thresholds result in rates of change that are uneven and unpredictable. Conventional predictive models and ‘ever-finer scale risk assessments’ thus have limited power in the context of non-linear change (UNEP-FI (UNEP Finance Initiative) 2011: 10). Over time, increasing unpredictability will tend to undermine the viability of the insurance industry (Phelan, Henderson-Sellers and Taplin 2010). The concept of‘the trillionth tonne’ (see Allen et al. 2009) makes plain the importance of reducing quickly anthropogenic emissions, as does the defining of the Anthropocene and the challenges this poses for the future of environmental security (Shearing, Harrington and Holley forthcoming).