Climate change risk is rising, and yet behavioral economics research argues that we are collectively underinvesting in protecting ourselves. In The Ostrich Paradox: Why We Underprepare for Disasters, Robert Meyer and Howard Kunreuther point to several personal traits that expose us to greater risk from natural disasters. First, individuals focus on short time horizons and thus underprepare for future threats. Second, when major disasters do occur, individuals are shocked but quickly begin to let their guard down again. Third, people are over-optimistic and thus underestimate their own risk exposure.
And the risks are real: Zillow’s research predicts that $400 billion dollars of real estate value in Florida could be at risk from climate change by the year 2100.
It might seem, then, that private insurance can be of little help in addressing climate change. There’s concern that for-profit insurers won’t want to insure risky properties, and that individuals won’t have the wherewithal to buy insurance plans in the first place. It’s certainly true that private insurance is not enough, on its own, to mitigate and adapt to climate change. Nor can insurance fully prevent the massive harm caused by storms like Hurricane Harvey, which recently struck Houston, killing at least several residents and causing considerable damage.
Nonetheless, private insurance has a significant role to play. And we believe that the concerns raised by behavioral economics are overblown. Sure, we aren’t perfectly rational. But the emerging challenge of reducing risk exposure for coastal residents creates new opportunities for firms that can innovate and provide new solutions. Innovations in spatial sciences, combined with big data, raise the possibility of the insurance industry introducing innovative pricing strategies that induce private real estate owners and local governments to take efforts that together yield a more resilient real estate capital stock. In short, the insurance industry is adapting in order to profit from climate risk, and in doing so it will help society adapt as well.
See full story at hbr.org