17 Apr 2014

Are Climate Change Mitigation Policies Like a Form of Insurance?

Climate Change, Insurance, Shameless Self-Promotion 24 Comments

I argue no. Or at least, if they are, they’re really expensive and very few people would buy them voluntarily. I walk through the numbers here, but a quick sampling:

Now ask yourself: Suppose someone from an insurance company came to you in the year 2050 and said, “We’ve run computer models many thousands of times using all kinds of different assumptions. In the worst-case scenario, a very small fraction of the computer runs—about 1 in 500—has you losing 20% of your income in the year 2100. In order to insure you against this extremely unlikely outcome that will occur in half a century, we want to charge you 3.4% of your income this year.”

Would you want to take that deal? Of course not. The premium is way too high in light of the very low probability and the relative modesty of the “catastrophe.” When someone’s house burns down, that’s a much bigger hit than 20% of annual income. And yet, the premiums for fire insurance are quite reasonable; they’re nowhere near 3.4% of income for most households. Moreover, the threat of your house burning down is immediate: It could happen tomorrow, not just fifty years from now. That’s why people have no problem buying fire insurance for their homes. Yet the situation and numbers aren’t anywhere close to analogous when it comes to climate change policies.

24 Responses to “Are Climate Change Mitigation Policies Like a Form of Insurance?”

  1. Josiah says:

    This is very very good.

  2. Andrew_FL says:

    Ah but we now have precedence for insurance meaning something other than a voluntary contract between to parties to manage risk. So arguing from the correct meaning of the term insurance will get you nowhere.

    Now do you see why I insist on what words actually mean and not how they are used?

    • Matt M (-Dude Where's My Freedom) says:

      I had a perfectly good climate change policy, but then the evil greedy company cancelled it on me because of new regulations stating that all policies have to include coverage for “rain during your fourth of July BBQ” even though I’m a vegetarian!

    • andrew' says:

      Are you me?

      Considering aca is also a very thinly disguised wealth transfer to the poor, the analogy is almost exact.

  3. Innocent says:

    Heck I have a $1.5 Million life insurance policy and it is less than .6% of my income. I purchased this to make certain my family has benefits in case I die ( not that the Government would not also provide social security ) but I would rather be ‘safe’ for their sakes than sorry. Had the price been higher I would NOT have purchased it… I would have mitigated the circumstances as best I could but not invested in life insurance at least not at that level.

    • Bob Murphy says:

      And Innocent, I’m guessing $1.5 million is more than 20% of your income too? That’s the other leg of the argument.

  4. Tel says:

    In order to insure you against this extremely unlikely outcome that will occur in half a century, we want to charge you 3.4% of your income this year.

    No, no, no! That’s not the deal. They will take 3.4% of your income this year without offering any guarantee of insurance protection, nor any guarantee of anything. If some hurricane or drought or whatever comes along it will still be your fault, and you won’t get a cent of your contributions back.

    An insurance contract involves a clear and tangible definition of the event that triggers a pay-out. If you crash your car, we buy you a new one, or if your house burns we build it again. This so-called climate insurance is a very different and unrelated concept. Do not allow the word “insurance” to be captured by manipulators.

    • Matt M (-Dude Where's My Freedom) says:

      What about government subsidized flood insurance for people who live on the beach?

      • Tel says:

        If there’s an actual contract with a clearly defined trigger event (a flood is defined a X, Y, Z) and you get a well defined payout (we build you a new house, up to the value of $$$) then it is insurance.

        Otherwise, it’s some other crap, not insurance.

        I would regard Obamacare as insurance, but because it is compulsory we can’t say that people choose this because they want it, we can only say they choose it because the penalty is worse.

  5. Keshav Srinivasan says:

    Bob, don’t (some of) the models predict an small probability of utter catastrophe, like extremely large numbers of people dying? People like Krugman make the argument that what we really have to worry about is these “fat tails”, and that that’s the actual impetus fof action, not the substantial probability of large but manageable economic damage.

    • Ken B says:

      Even granting that Keshav, is insurance an apt word here? Declining to travel is not like travel insurance. Seat belts are a better analogy I would think. The idea is prophyllaxis. I’m with Tel on this: don’t corrupt the word insurance.

      • Keshav Srinivasan says:

        Well, from a ten-thousand foot view, seat belts and travel insurance are fundamentally the same thing: a trade-off that’s made out of risk aversion. You exchange the certain cost of travel insurance premiums for the risk of costs from travel. Similarly, you exchange the certain cost of seat belts for the risk of costs from accidents without a seatbelt. In both cases. you’re paying a fee to be insulated from costs that may arise a certain risk, whether it’s done by paying a third party to bear the costs of the risk for you, or whether it’s actually eliminating the risk.

        So the pricing model you would use to evaluate whether it’s a worthwhile investment is the same: you have to determine your tolerance for risk or equivalently, if you accept the von Neumann-Morgenstern axioms, the extent to which you have diminishing marginal utility.

        • Ken B says:

          Not really. Prophylaxis can be used against sure things, or things everyone believes certain. And they need not be perceived as a cost. Prayer is often intended as a prophylactic against just punishment by those who enjoy it. Prophylaxis and insurance are different concepts.

    • Keshav Srinivasan says:

      The gist of my question is, is IPCC worst-case scenario the absolute worst case, or are there individual climate models that predict even worse scenarios?

      • Ken B says:

        There are. It is stil prophyllaxis not insurance isn’t it?

        • Andrew_FL says:

          Oh really, name them.

          • Ken B says:

            There’s the inverse Aardvark model. I created it moments ago. It predicts the world will catch flame next week.

            Are you seriously questioning there are models that predict much worse than the IPCC report? How about the IPCC report from a few years ago? How about Al Gore?

            Here’s yet another one. http://www.allgov.com/news/controversies/the-most-catastrophic-climate-predictions-are-seen-as-the-most-probable-140104?news=852076

            You a catasrophe-predictor denier Andrew?

            • Andrew_FL says:

              Yes. Yes to all of your ridiculous questions.

              “Model” doesn’t refer to someone’s feverdream about what “could” happen. It refers to a actual model of climate. As it a set of equations being solved numerically by a computer.

              God the way people use the word model in the social sciences is embarassing.

              • Ken B says:

                I am not in the social sciences. You seem to think I am endorsing those models. I am not. I am agreeing with Keshav that they exist, not that they are plausible or worthy of attention.

              • Ken B says:

                Yes to being a catastrophy-predictor denier? You deny Gore or Mann predicted catastrophic warming? Seriously?

              • Andrew_FL says:

                I deny their predictions are based on any actual model.

              • Tel says:

                I believe that Al Gore does use a model when he comes up with his Global Warming speeches.

                It happens to be a financial model, largely oriented around the profitability of scaremongering. It seems to have been pretty successful for him too.

              • Ken B says:

                Mann’s hockey stick is not a model? Of course it is. It’s a crappy one. But Bob is still a karaokeist.

    • andrew' says:

      If true, that would argue for technology which would also be a lot more like insurance, and probably not coincidentally the proper course of action.

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