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18 Sep 17 01:25

The current thinking on insuring of natural assets and capital is one of solving an externality problem. The externality being degradation or damage to natural capital and assets as a results of commercial and industrial activity, or more generally, as a result of social and economic development. As an insuring for externality problem, I see this primarily as a demand side challenge, and less of a supply side difficulty. On the supply side, the insurer firm is ready to provide coverage for risk to assets owned by private or public sector actors, NGO(s) or IGO(s). For the insurer, there is of course the technical challenge of defining the fair price of risk and determining the best insurance product to cover the liability and to supply to market, but these are technical challenges, which are solvable. They have been solved before and many times.  These are not principal problems. On the demand side the picture is quite different. [1] We have the ownership problem. Some natural assets have defined public or private sector ownership, but some are common heritage: high seas, deep seabed, Antarctica, international air and space, etc., etc. For the latter, clearly the lack of a single and defined owner precludes the possibility of purchasing and holding and insurance contract of any kind. This is typically and inevitably how we get in a tragedy of the commons scenario. [2] For natural assets, which are clearly in public sector ownership, fiscal instruments may be a more natural choice than insurance contracts for central and municipal governments to solve externality problems. Sometimes, even public sector insurance schemas look more like fiscal stimulus programs. Then [3] there is the difficulty of measuring the externality and its causality. Whether it comes from a natural catastrophe, human activity, or it is due to natural ecological cycles. This causality or trigger of the externality to natural assets and capital defines the demand of the insurance contract holder. If a potential contract holder cannot clearly and explicitly define the causality of degradation and damage to natural capital his demand for an insurance contract remains week. Still it is not all unsurmountable difficulties and the EU Environmental Liability Directive is a good current example of a practical and working program. Review of EU ELD and some discussion is available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2343344


Category: Climate/natural disasters: Climate change, Floods/storms, Resilience

Location: Reykjavík, Iceland


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