Global Warming:
Constructing flood and insurance risks

Michael Huber discusses the difficulties of conceptualizing and measuring flood and insurance risks.

Various facets of global warming can be described in terms of risk. The media claim global warming puts penguins and polar bears at risk, that it causes flood or storm risks and challenges firms that might risk climate-related law suits. Nonetheless, it is debatable if risk provides a feasible concept for the management of global warming. The applicability of the risk concept is restricted by global warming being not a single event, but a bundle of partially unknown and unknowable effects that only through considerable efforts, eg complex simulation models, can be linked to the actual cause, rising carbon dioxide emissions. Even if comparing IPCC-scenarios over time unveils a steep learning curve, the difficulties remain in attributing accurate probabilities to events and damage costs. Apart from the unknowable effects challenging the attribution of probabilities, the fact that global warming undeniably causes disruption and damage is also a source of uncertainty. The same disruptive event may be beneficial for some and disadvantageous for others – and so reveal itself as a major source of irresolvable conflicts. Bjorn Lomborg’s praised book about the state of the world’s environment, The Sceptical Environmentalist, was fiercely criticized and challenged in court as it failed to recognize that the attribution of current costs and benefits defines a political battleground about future distributions rather than establishing a long-term consensus. These conflicts are amplified by the impossibility of tracing the effects back to individual decisions and therefore it is equally impossible to hold people, organizations or countries liable for their climate-related decisions.

Although responding to environmental risk has never been a straightforward affair, managing global warming brings extraordinary difficulties to the forefront of risk management. From the 1970s to early 1990s, environmental problems were judged a preventable burden to the economy. As a result, efforts at curbing environmental effects were considered a luxury and restricted in scope. The emergence of global warming altered this narrow view in at least three ways. First, environmentally friendly solutions could be perceived as economically advantageous. Second, since the late 1980s environmental problems have been conceptualized as risks. Third and most importantly, the political toolbox of command-and-control regulations seemed too limited to ensure long-term success. For example, in the search for environmentally and economically sustainable solutions insurance was identified as a solution i.e. environmental problems were cast as insurance risks. The political advantage was that insurance could price unwanted effects and thus send a clear message to organizations and individuals about the ranking of risks. This would take the political heat out of the issue. However, there are two limitations to this approach. First, relying on insurance gives an adaptive solution while political communication by and large favours preventive strategies. Second, just as in skiing insurance one can only insure against injury and medical costs but not against skiing itself, similarly one cannot buy insurance coverage against global warming but only for compensation for some of the devastating and unknown effects it might have on properties, lives or other valuable activities. Although insurance firms have been active in the context of natural hazards for decades, their solutions cover only a limited area of environmental risk management. Thus, insurance does not substitute for politics, but provides an additional policy tool.

Global warming, however, is doubly problematic for insurance. With the rising frequency of natural hazards, risk predictions tend to become less accurate and consequently, assessments of insurability less reliable. Costs are thus difficult to assess and the growing fear of adverse selection impedes coverage. Insurance firms are therefore inclined to exclude the coverage of natural hazards just as the need for insurance is growing with the urgency of environmental risks. Hence, the pressure on insurance firms for coverage is growing at a time when political actors are inexperienced about the economic and social demands to better contain the disastrous effects of natural hazards.

Insurance risk management is not only problematic where insurance firms can manage only some features of global warming, but it where it has been used to define the actual subject, global warming. Insurance will shape the risk of global warming in a particular way, a hypothesis I described below in the example of flooding.

When actors refer to floods, it is assumed that the event is well defined. But is it? Historically, floods were perceived as divine punishment. In Noah and the Ark, God flooded the entire globe as punishment for wickedness. Modern science neutralized this divine model and conceived flood as natural events without immediate significance, intent, meaning or plan. Floods are now considered to be caused by natural cycles of rainfall patterns, tides or random events. The scientific narrative decoupled the event from intentional interventions which make floods somewhat pointless as such a definition lacks usability in a political or economic context. The common ground of all flood definitions is best explained by the Concise Oxford Dictionary as ‘an overflowing or influx of water beyond the normal confines esp. over land’. Floods therefore mean ‘too much water’. But for insurance purposes, floods are significant events only when they can be linked to unintended and measurable, mainly negative, effects. The yearly flood of the Nile is a flood, but not for insurance because its effects are generally benign. For insurance purposes relevant floods are usually damaging, unwanted with an uncertain, irregular frequency. To manage floods, insurance policies transform the natural event of ‘too much water’ into a man-made disaster. The definition of floods is then qualified through institutional constraints, legal obligations and liabilities, references to political frameworks and to indicators of societal vulnerability. These criteria vary over time and across space. Let me demonstrate a few of them.

As flooding triggers emergency aid, compensation and liability claims, it has not only to be defined unequivocally but also in such a way that organizations and institutions are able to decide when they should intervene and when they should restrain themselves. For example, the US Federal Emergency Management Agency (FEMA) specified ‘floods’ with the example of the worst controllable accident that needs to be avoided: ‘A dam failure is usually the result of neglect, poor design, or structural damage caused by a major event such as an earthquake. When a dam fails, a gigantic quantity of water is suddenly let loose downstream, destroying anything in its path.’ ‘Too much water’ is connected with a technical breakdown and a flood can therefore be blamed on maintenance or regulations and end up in court or in the political arena. Then the main risk is not flooding, but the failure to prepare against dam failure. Similarly, the UK Environment Agency defined flooding as ‘inundation by river or sea water whether caused by inadequate or slow drainage or by breaches or overtopping of banks and defences’. The insufficient protective measures burdened regulatory actors with the responsibility of managing flood, not as a natural hazard but as a socio-technical event. Controlling protective measures such as the construction of dams, land-use and the required robustness of assets become the focus of flood-risk management. If it is not private firms, as in the British example, but public actors that predominantly manage flood risks; they have similar strategies, but develop a different set of criteria. In a summary report of a Franco-German action-plan for flood protection from the mid-1990s, floods were linked to the growing urbanization, settlements on flood plains and interferences with the watercourse and water balance. Flood was qualified by the vulnerability of social systems and by protective measures, not by the exposure of individual assets and adaptation.

The influence of insurance on flood definitions does not stop here. Our understanding of floods depends largely on what happens after the event. In the legal context, floods are defined by three compensation indicators that vary greatly. For example, the Belgium government defined a flood as causing at least £930,000 of damage which implies that the average amount per family must be at least £4,000 and by the affirmation that a similar disaster will occur only every 20 years. Quite differently in the US, a flood is defined as water damage to two or more neighbouring properties. Compared to the British definition where floods ought to happen only once every 70 years or to the Netherlands where flood protection allows for such events to occur only once every 200 years, the Belgian flood frequency sets a low standard for flood protection and a low threshold for compensation.

However, not only is a flood shaped according to managerial needs, but also the concept of risk itself is up for practical adaptations. Commonly, risk comprises two elements, the probability of the occurrence of an event and the damage inflicted by this same event. In a publication of the Association of British Insurers, risk is substituted by a risk triangle linking hazard, a combination of the frequency and severity of an event, with vulnerability, indicating the extent to which an asset is affected by the hazard, and exposure as measure of the extent to which an singular asset is exposed to hazard. These two supplementary notions of vulnerability and exposure transform floods into an insurable risk as they focus on insurable property. However, they do so only in an institutional setting dominated by private insurers. The Franco-German report did not define flood risk in terms of individual assets but rather as a collective problem within a limited geographical or political constituency. The threat is now specified by ecological functionality and original land-use as policy makers aimed at setting acceptable risk levels applicable to all residents in a certain area.

Global warming is a risk that consists of several risk events. Focusing on one of them, I showed how the risk concept is adapted to managerial needs and how practical solutions shape this risk and its management. Applying the experiences from flooding, we can hypothesize that the choice of managerial strategies to curb the effects of global warming will define the political weight of events, of who ought to be protected and within what time horizon the problem may be conceived as hazardous. For example, choosing insurance implied that disastrous effects on property are ranked higher on the political agenda than for example, losses in biodiversity or economic consequences for poorer groups in society. Public policies will usually transform global warming into a collective good problem and focus on social inequalities, while insurance focuses on private coverage. This generates not only different weights and ambiguous rankings, but the need to equilibrate those differences. Risk becomes not only a regulatory, but also (or even mainly) a communicative tool. Due to the variations of definitions sketched above, we hardly know what we mean when we talk about flood except for ‘too much water’. The flood example taught us how the path dependency chosen at an early stage shapes the political and managerial manoeuvrability of risk management for a long period. Against the general impression that risk unifies and from a critical perspective normalizes the management of a certain group of events as it provides a common managerial language, my brief analysis show that it rather veils the managerial intent and sets an opaque path dependency that once established is difficult to disclose and challenge. Thus responding to global warming in terms of risks may add to confusion and uncertainties rather that contribute to feasible solutions.

Michael Huber, Institute of Science and Technology Studies and Faculty of Sociology at the University of Bielefeld (Germany) and CARR Research Associate huber@iwt.uni-bielefeld.de

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