The $5 Trillion Global Insurance Industry's Climate Change Problem

In 2017, natural disasters resulted in an estimated $340 billion in damage. This resulted in insurance payments totaling $138 billion.

Boo hoo, right? Wrong. Nobody really loves insurance companies, but they are still a key component gluing the global economy together. You see, capital is critical to the economy. Capital loves returns, but it hates risk. As a result, investors expect to be compensated appropriately for a given level of risk. That means they must understand, evaluate and mitigate risk. Part of this involves various types of insurance. These risk-hedging techniques are as critical to the individual investing capital into a family home as they are to the global multi-national investing capital to trade with foreign counterparties. These risk-hedging activities are inextricably tied together via written and unwritten expectations and trust, on which the global economy is built.

Insurance companies measure risk using historical data, which tends to exhibit predictable patterns. Change the patterns - the risk paradigm - and the predictability of exposure across the insurance industry disintegrates. A pillar of capitalism weakens and, after a tipping point, suddenly nobody trusts anyone. Investors shoot first and ask questions later, indiscriminately selling in fear of what they don't know they don't know.

Such a scenario would look like the Global Financial Crisis of 2008/2009 or the Great Depression of the 1930s. We found our way through previous economic crises - will we again when the next crisis hits?


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