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Climate Change and the Transformation of Risk: Insurance Matters


Sean B. Hecht


University of California, Los Angeles (UCLA) - School of Law

July 14, 2008

UCLA Law Review, Vol. 55, No. 6, 2008
UCLA School of Law Research Paper No. 08-24

Abstract:     
Climate change will increase risks significantly in many areas of society, and also will render far less measurable many risks that were previously calculable. If our society is to survive climate change without significant human costs, we must develop robust institutions and practices to manage these risks. The insurance industry is our society's primary financial risk manager, and needs to play a leading role in developing these institutions and practices. But climate change poses an unprecedented challenge to the insurance industry, because factors such as increasing uncertainty and the potential for highly correlated losses will make it difficult to insure against climate change-related risks and will strain capital markets' ability to compensate those who are affected. If the industry rises to the challenge, it stands to profit while facilitating our most successful responses to climate change-related threats around the world. If not, insurers will suffer along with everyone else. A report issued recently by a major financial firm identified climate change as the number one 'strategic threat' facing the insurance industry, noting that it is a 'long-term issue with broad-reaching implications that will significantly affect the industry.' To date, however, there has been relatively little effort to examine what supply- and demand-side barriers may be impeding development of insurance products that address climate change risk effectively. In this context, this Article examines the incentives that insurance products provide to influence the climate change-mitigating and adaptive capacity-building behavior of policyholders and other actors. It also looks at the reasons that insurers might or might not choose to provide those products and the reasons individuals and businesses may or may not choose to purchase those products. Finally, it examines the extent to which the insurance industry's products are likely to play a significant and effective role in affecting private actors' responses to climate change. The Article concludes that although it is not yet clear whether and how the insurance industry will be able to address climate change in a way that systematically creates solutions, the industry's future - and perhaps the rest of ours as well - may rest on the success or failure of its adaptation to a world with a changing climate.

Number of Pages in PDF File: 63

Keywords: climate change, global warming, environmental policy, insurance, risk management, sustainability, corporate social responsibility, catastrophic risks, behavioral economics

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Date posted: July 15, 2008 ; Last revised: September 24, 2008

Suggested Citation

Hecht, Sean B., Climate Change and the Transformation of Risk: Insurance Matters (July 14, 2008). UCLA Law Review, Vol. 55, No. 6, 2008; UCLA School of Law Research Paper No. 08-24. Available at SSRN: http://ssrn.com/abstract=1159853

Contact Information

Sean B. Hecht (Contact Author)
University of California, Los Angeles (UCLA) - School of Law ( email )
385 Charles E. Young Dr. East
Room 1242
Los Angeles, CA 90095-1476
United States
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