Pricing Climate Risk
Economics has been called the dismal science. That label might seem to apply in spades to a novel sub-specialty: the art of pricing the risks of climate change, a concern not least to the insurance industry.
To get the basics, you could do worse than to talk to Dag Lohmann. Physics at the U. of Göttingen in Germany. Post-doc in civil engineering at Princeton. Six years with the National Weather Service. Almost eight with a leading risk modeling company, RMS. Ten, and counting, with his own Berkeley firm, KatRisk LLC, focused on various kinds of flooding. Oddly, at the end of that conversation, you might come out feeling just a little less dismal.
Insurance shifts costs from individuals to groups. It also shifts costs from after an untoward event to before. Your auto insurance shares your risk with millions of other drivers, giving each a small load now to protect each against a possibly crushing burden later. Flood and fire insurance, ideally, should work the same way; but the creeping change in climate is changing their arithmetic.
Just how much, and with what financial consequences, is Dag Lohmann’s province. His team knows and applies the latest science. “We’re the middleman between scientists and insurers,” he says. “We rely on research and data from universities and government labs, but do our own simulations.” Lohmann can, for instance, quantify the creep in storm surge losses caused by sea level rise. In the U.S. these are climbing by about half a percent per year, he says, a rate that is sure to increase.
The news is less bad for inland flooding and those seeking insurance against it. Premiums vary wildly nationwide. Some properties should be paying more than they do now for their policies, but many should actually be paying less. Subtle assessments can bring fairer pricing; they can also help in the design of protective measures. Financial players of several kinds may find it prudent to invest in prevention, reducing the cost of cure.
Like big fleas feasting on littler fleas, insurance companies also buy insurance, to cover them against the occasional catastrophic loss; specialized re-insurance companies, with names like Swiss RE and Munich RE, exist to fill this role. A further wrinkle has recently emerged: the packaging of these reinsurance policies as bonds sold to investors—what the trade calls securitization. People with money buy these “catastrophe bonds,” (cat bonds for short), taking the risk of the occasional bath (a risk to be assessed by analysts like Lohmann’s) in return for considerable annual profit.
Other Recent Posts
Follow Us on Bluesky
KneeDeep Times is excited to share our news on Bluesky. You will no longer find us on Twitter/X.
Lighting a Fire Under K-12 Climate Literacy
In a sixth-grade Petaluma classroom, children are exploring how to make wind energy, fulfilling new state mandates to build climate literacy.
Can Sitting in Traffic Give You Parkinson’s?
A new study investigates whether long-term exposure to traffic-related air pollution can increase the risk of developing Parkinson’s in three California counties.
Wildfire in the Big City?
San Francisco’s 2025 Hazards and Climate Resilience plan says the city’s urban forests pose a moderate wildfire risk. One resident thinks preparedness could be challenging.
Science Is Like Punk Rock
Biomedical engineer Cynthia Prieto-Diaz is bringing DIY air quality monitors, community cleanups, and a punk spirit to environmental activism in San Leandro.
When Housing and Climate Crises Collide
Marin’s failure to develop truly affordable housing sparks debate about equitable growth and climate resilience in a fast-gentrifying county.
The Solar Battery You Already Own
As California aims for net zero, bidirectional EV charging may be key to achieving clean energy goals. Kurt Johnson talks solar, EVs, and SB 59.
Bolinas Can’t Ignore Pacific Advance Much Longer
As sea levels rise, a Bolinas architect is sparking a new conversation on coastal retreat. Steve Matson’s vision could relocate this Marin County village to higher ground.
Feds Shoulder Marin City’s 80-Year-Old Drainage Problem
After decades of neglect, Marin City will benefit from a $13.5 million flood-reduction project fully funded by the U.S. Army Corps of Engineers.
Six “Unrealistic” Ideas for Deep Greening San Francisco
We need bolder visions for San Francisco’s future this election. From car-free downtown zones to sustainable sports complexes, here are six “unrealistic” ideas that challenge the city’s status quo.
When Hurricane Katrina struck the Gulf Coast in 2005, a specialized fund called Kamp Re took a heavy hit and dissolved. Its investors lost about three quarters of their money. But Kamp Re did pay its insurance company clients, and those companies in turn paid the individual policy holders. In a sense, the system can be said to have worked, shifting cost from those least capable to those most capable of paying.
Katrina dramatized the need for better risk assessment, but it did not dampen the rise of “cat bonds.” The National Flood Insurance Program (the nation’s largest single-line insurance program) issues quantities of these, and KatRisk is right there, acting as “calculation agent” for the last five rounds of bonds. The company has thus helped shift more than $1 billion in hurricane risk from NFIP to the capital markets, Lohmann says.
In California, far from hurricane country, the flood risks tend to be more chronic than dire. The typical problem here is different: too few of us can find affordable insurance, making post-disaster recovery hard. The community benefit insurance concept (see “Overhauling Insurance” below) is a possible fix, applicable also to fire. Earthquakes are another matter, where the catastrophe bond concept might apply.
So here is an industry, not known for altruism, doing its part to wrestle with huge societal problems. This is surely encouraging, up to a point. But as climate weirdness mounts, there will be more and more situations where the insurance model is simply obsolete. “Over what time frames,” Lohmann asks, “might insurance not be possible anymore in parts of Louisiana or Florida?”
The story has its dismal side, after all.
Average annual loss to storm surge from Atlantic hurricanes in billions of dollars under different global sea level rise scenarios in meters by the year 2100. The analysis translates government data (the latest NOAA sea level rise projections) into financial losses. (VLM = vertical land movement, largely from Louisiana and Florida sinking.) Source: KatRisk.
