Insurance and the Anthropocene: like a frog in hot water

Herbstein, Tom Philip

Insurance and the Anthropocene: like a frog in hot water

Doctoral Thesis

2015

Publisher

University of Cape Town

Department

Department of Public Law

Faculty

Faculty of Law

Abstract

This thesis explores the relationship between the commercial insurance industry, global environmental change (GEC) and what Beck (1992; 1999) termed the 'risk society'. In recent decades, there have been growing concerns that many of the risks impacting contemporary society have undergone fundamental changes. Many of these risks are increasingly being linked to the unintended consequences of humankind's remarkable progress in science and technology, and have been described as debounded, given that they so often transcend both geographical and temporal boundaries (Beck 1992). Within the risk society, the commercial insurance industry - which relies on statistical (actuarial) analysis to help it assess and manage its risk exposure - has been described as demarcating the frontier barrier between bounded (i.e. insurable) and debounded (i.e. uninsurable) risk. However, this claim has been a highly contested one, leading to calls for more empirical data to help clarify how commercial insurance is actually responding under conditions of uncertainty. Of all the debounded risks, GEC has emerged as one of the risk society's most recognisable. Now understood to be a result of the anthropogenic emission of greenhouse gasses, particularly since the onset of the industrial revolution, its impacts have risen so sharply in recent decades that it has prompted claims that Earth has moved away from the era of the Holocene and into the Anthropocene (Crutzen 2002). Given that at least 40% of the cost of environmental catastrophes is now borne by commercial insurance, GEC provides an excellent opportunity to gain a deeper understanding of how the industry is responding to debounded risk at the risk society's frontier barrier. Early commentators suggested that the commercial insurance industry would be well motivated to respond proactively to GEC, by taking a more mitigative approach to managing its drivers at both the global and local levels. However, the industry, so far, has been described as more adaptive of its own business activities than mitigative. This raises questions about whether such claims are true across all three of the insurance industry's activities - as risk carriers, risk managers and as investors, why they have responded in such ways, and what implications this has for broadening our understanding of the complex relationship between commercial insurance, debounded risk and the risk society's frontier barrier. To consider these questions, a collective case study was undertaken with a variety of commercial insurance companies, re-insurers, asset managers, clients, brokers, industry associations and regulators across South Africa, Germany, Switzerland, the United Kingdom and Belgium. The research identified how commercial insurers have indeed responded more by adaptation of their business activities than mitigation of the drivers of GEC. This is mainly through the use of defensive underwriting to help them manage their exposure. However, the research extends this analysis by highlighting some of the nuances of the industry's response. This includes its focus on centralisation, the influence of the existing paradigm framing its understanding of risk, and by highlighting the irony that the area of insurers' activities, initially believed to be most suited for responding to GEC (i.e. their investment portfolios), have, in practice, been the area recording the least response. In exploring why this is so, the study draws on understandings of the Anthropocene to argue that commercial insurers are finding their existing risk assessment tools progressively out-dated in a world where risk is no longer as predictable as it once was. This is further compounded by increasingly plural access to the risk society's science and technologies, which, in some instances, are undermining the role commercial insurance plays as society's primary financial risk manager. This raises questions around the role commercial insurance plays in demarcating the risk society's frontier barrier which, ultimately, has far broader implications for why so many of society's institutions are struggling to adapt to risk in the 21st Century.