Who must pay for Natural Disasters?

I heard the term “Gedanken Experiment” for the first time in my very first quantum physics class in college.  It sounded mysterious and intriguing, until I learned what it was, “A Thought Experiment”.  It’s typically used for philosophical discourse or in theoretical physics, but it can be applied to the current topic just as well.

I bring this up not to appear ostentatious but to make a simple point that any body of knowledge, once embraced and dug into rationally by any human mind, is attainable and advances human understanding of the subject, hence advances human wellbeing.

There is no knowledge more pressing for universal human comprehension today, than the impact of human actions on climate change, hence climate disasters today and into the future. 

Since most businesses, regardless of long-term strategy, are judged by their short-term bottom line, even well-meaning businesses will hold off on taking the much-needed action required to reduce Greenhouse Gas (GHG) emissions to avert climate change, until all their competitors are also forced to do so.

Let’s do a Gedanken Experiment therefore, to ascertain where the accountability lies for the very large insurance bills resulting from natural disasters today and given the trajectory of increasing frequency and intensity of natural disasters in the recent past, insurance costs that promise to skyrocket into the future! 

Who then must pay for this rising cost?

1.       God must pay.  Some readers might be inclined to conclude that natural disasters are no one’s fault really and that they are in fact God’s doing.  Well, to that false accusation, the Almighty will turn right back to us mere mortals and tell us that a perfectly good planet was created some 4.5 billion years ago with a grand plan to inhabit advanced lifeforms (humans), and that in fact it was humans as they evolved, who managed to exacerbate natural disasters by virtue of their vices: hubris, willful ignorance and greed (irrational selfishness).  Failed experiment.

2.       The Government must pay.  Yet other readers might conclude that why of course, the government must pay!  After all, that’s the reason we elect a government, to protect society from unforeseen situations that impact us all.  Quite simply, raise taxes and let the wealthy foot the bill.  There’s only one problem, if businesses cannot survive, there won’t be any wealth left over to pay the taxes.  Failed experiment.

3.       Insurance companies must pay.  Hang on a minute, the concept of insurance was created precisely for such circumstances.  Simply send the checks to the insurance companies and hold them accountable for their role in civilized society.  Unfortunately, the statistical premise used to create the insurance concept is not holding out in the face of natural disasters that are incessantly increasing in frequency and intensity.  It is no wonder then that insurance companies are pulling out of disaster-prone locales and are planning monumental increases in premiums across the board.  There is no free lunch so to speak.  Failed experiment.

4.       Tough luck, if you live in a disaster-prone area, you should pay.  After all life isn’t fair, businesses that are located in disaster prone areas must pay, that is all there is to it.  The reality of today’s highly connected world is that each of us and our business success is likely to be impacted by supply chain and customer impacts in unknown corners of the world.  Besides, businesses that fail due to their financial losses from natural disasters, will ultimately relocate to other relatively safer locales, increasing population densities in those regions.  An unhealthy competition for limited resources will ensue, leading to the deterioration of that locale as well.  Failed experiment.

5.       What then?  Can we in fact discover the root cause of the problem, and place the accountability where it belongs?  The answer to that is a resounding “Yes”.  GHGs that accumulate in the earth’s atmosphere accelerate a rise in the earth’s surface temperatures causing unnatural weather patterns that exacerbate natural disasters.  There is well documented evidence that lists all the GHGs, including but not limited to carbon dioxide, methane, nitrous oxide, etc. that are at fault.  There is also a clear understanding of human activity that emits these GHGs into the atmosphere.  And while it is not feasible to magically flip the switch on these deleterious activities, there is also, in each instance an alternate activity or process that can in fact result in long term cost savings while concurrently reducing GHG emissions.  Change is uncomfortable to humans, even if it serves to benefit them in the long run.  Success at last!  So, how do we bring about this necessary change?

Here is where insurance companies can help themselves pay for their own skyrocketing costs while placing the financial burden where the accountability lies.  A free market is set up precisely to solve such thorny problems.  For example, if insurance companies reward businesses that demonstrate a significant year-on-year reduction in GHG emissions with lower insurance premiums and conversely charge higher premiums to those businesses that do not, they are setting in motion the wheels of free market-based evolution to save the human race from destroying itself.  The financial burden of increased natural disasters, then falls fairly and squarely on the worst offenders, in proportion to their contribution to GHGs in earth’s atmosphere which are the root cause of the intensifying natural disasters.  So instead of unfairly raising premiums on all businesses in a natural disaster prone geographic area, or worse yet, depriving them of insurance altogether, the businesses that are most accountable for high GHG concentrations will pay the highest price.   Of course, as these businesses lower their GHG emissions, so also will their insurance premiums show a proportional decline.

SELE Solutions, LLC is happy to work with actuaries who wish to take on a mathematically accurate solution to this problem and save their industry from financial decline. SELE is also happy to work with prescient businesses wishing to make a measurable dent in reducing their GHG emissions. 

Reach out to SELE at info@selesolutions.com or 248-975-7353 to move your business forward.