“We at Ethical Markets are always on the lookout for ground-breaking thinking and ideas for addressing our many planetary crises. We are even happier when such innovative thinking as in this article by Brian Cady, is by a member of our own global Advisory Board. Cady explains how the emergence of Underwriters Laboratories led to greater safety and acceptability as electrical power was first developed in the USA. Expanding on this collaborative innovation by insurance providers, business leaders, and visionary academics, Brian Cady proposes such an analogous organization to identify, underwrite, and thereby help mitigate insurable climate risks. We think that Cady’s idea is ripe for our times, just like the earlier development of catastrophe bonds by Dr. Graciela Chichilnisky at Columbia University, also on our Advisory Board. We will be helping to bring this article to the attention of financial and insurance executives in our network on both sides of the Atlantic. Read on.
~Hazel Henderson, Editor“
HARVESTING A SILVER LINING FROM THE CLIMATE CLOUD.
By Brian Cady
©2020 Brian Cady
Many have struggled to contain Earth’s climate crisis. But who has both the means to contain this climate crisis, and the motive of understanding climate risk and their ability to contain it? We at risk are numerous; many of more than seven and a half billion members of humanity have the motive which understanding provides. Most of us, however, lack the means to preserve our climate; of the few with the means, there are fewer still understanding this climate risk and their ability to contain it. The recent ‘Great Reset’ initiative from the Davos conveners, (the World Economic Forum) is surprising in demonstrating that this important confluence of understanding is spreading. Also encouraging is the letter that Deputy Governor of the Bank of England, Samuel Woods, sent July 1st 2020 to corporate chiefs he regulates, which specifies by when (2022) climate risk disclosure must take place. Addressed there are many prominent insurers and underwriters of the world. Among these, who knows they are at risk in this climate crisis; who has motive?
These global underwriters and insurers face catastrophic losses from the climate crisis. With about 27 trillion dollars in assets, do they have the needed means? How much is needed to contain the climate crisis? Two prominent estimations are the Stern Review and Project Drawdown.
The Stern Review of 2006 estimates annual climate crisis containment costs to be 1% of World Gross Domestic Product (WGDP), with damages thus avoided at 5% of WGDP. In 2019, WGDP totaled about $87 trillion, hence annual climate crisis containment costs would near $870 billion a year. If three decades of containment were invested in at once, at a cost of $26.1 trillion, underwriters and insurers would be left with about one trillion dollars in assets otherwise invested. Yet they stand to gain from the $131 trillion in climate damage costs avoided over those thirty years.
The Drawdown Review 2020 forecasts the cost and benefits of climate preservation in two scenarios. The first scenario forecasts $22.5 trillion in initial investments containing 994 gigatons of CO2 or equivalent greenhouse gases, with lifetime costs running to -$95.1 trillion and lifetime profits of $15.6 trillion. Please note that lifetime costs are negative here – in other words, they return more than four times the initial investment value, beyond the direct profit returned.
Historical examples of massive losses to which the insurance industry successfully responded include the fires that swept through US cities in the decades after the Civil War. Engineer William Henry Merrill, Jr., who oversaw fire safety at the 1893 Chicago World’s Fair, proposed that underwriters form a laboratory to test fire safety, and to establish fire safety standards that manufacturers could meet as they built new electric appliances for the burgeoning US market.
The following excerpt is quoted from Engineering Progress:
“The son of a prominent newspaper editor, Merrill was an energetic, articulate, and curious student with a strong interest in the many rapidly developing fields of science. Merrill bore the influence of the lively, intellectual household in which he was raised. Merrill’s father worked as a journalist, editor, and publisher, and took numerous public roles in business, government, and civic life, reflecting a keen interest in public service.
“Merrill was one of 21 students in his class at MIT who had taken courses in electrical engineering, a program that had only recently been established in 1882, one year after Thomas Edison first illuminated the Hinds, Ketchum & Co. lithography business in Manhattan. The dawn of the electrical age had arrived, and MIT was leading the way. Almost no one working in the U.S. electrical industry at the time had the science and laboratory training that the MIT program provided. Young Merrill was ready to lead in the emerging industry.
“After graduating, Merrill used his new degree to get a job as an electrical inspector with an insurance association, the Boston Board of Fire Underwriters. It was here that he got the idea that a service was needed to keep up with the dizzying pace of new electrical inventions and materials. For Merrill, the infant industry could squander the promise and power of this technology–with serious consequences for human health–if manufacturers and contractors failed to create a process for safety and production standards. Merrill urged his employer to get involved in a comprehensive system for examining and testing equipment for safety before its release to the public. His pitch failed to get traction, and the Boston Board turned him down.…
“In January 1892, Chicago Exposition Director Daniel Burnham was feeling the pressure. While progress had been made at the Fair site in Jackson Park with construction of a few major buildings, labor, safety, and financial challenges mounted. As Erik Larson wrote in The Devil in the White City, “there was tumult. Wage reductions and layoffs stoked unrest among workers nationwide. … A rising union man named Samuel Gompers stopped by Burnham’s office to discuss allegations that the exposition discriminated against union workers. … but what most concerned [Burnham] was the fast-shrinking treasury of the Exposition Company. In advancing the work so quickly and on such a grand scale, Burnham’s department had consumed far more money than anyone had anticipated.”
“By March 1892, Burnham had only half a year until Dedication Day and he ordered builders to double their workforces and erect electric lights for night work. Despite the overtime, the Exposition was not completed in its entirety for the dedication in the fall of 1892. Even by President Grover Cleveland’s appearance for its Opening Day on May 1, 1893, major installations including the Midway and Ferris Wheel needed to be finished. But by then Chicagoans and the larger world had seen the Fair’s size, scope, and architectural grandeur. The official name was the World’s Columbian Exposition, but under Burnham it became known as the White City. “To build it Burnham had confronted a legion of obstacles,” Larson wrote, “any one of which could have—should have—killed it long before Opening Day. Together he and his architects had conjured a dream city whose grandeur and beauty exceeded anything each singly could have imagined.”
“By the end of June 1893, Fair attendance was rising, hotels were filling, and news accounts were glowing. The popular Roof Garden Café on the roof of the White City’s Woman’s Building served 2,000 people a day, and janitors could not keep up with the garbage, which became fetid under the Chicago summer sun. Planners, architects, and social critics readily noted Burnham’s achievements in the White City, especially his commitment to erecting a coherent urban space that was served well by the technologies of construction, transportation, power, and light that were making and remaking the real cities of industrializing America. Yet while the White City presented itself as a model of reasoned planning, it too reflected the very impulses that had built industrial Chicago. Beyond the fairground gates, a “heavy pall of smoke brooded over the city,” and “the chimneys of a blast furnace belched their red flames high into the darkness,” one fairgoer recalled. The dangers of fire, crime, and chaos that hung over [Chicago] crept into the utopian world of Burnham’s creation. Beneath its brilliant facades the White City was a fire disaster waiting to happen.
“…Underneath this plaster city snaked miles of electrical wires and connections, an electrical infrastructure unmatched in any real city in the world at the time. Concerns over this new and untested technological system—the electrified building—and the flammability it presented led the fire insurance companies contracted to underwrite the fair to consider denying coverage for the fairgrounds in 1892. The financial and human losses from the Great Chicago Fire of 1871 were seared into their minds. The Exposition’s Palace of Electricity agitated the underwriters most of all. Here, Burnham’s builders had snaked a frightening criss-cross of untried electrical hookups in close proximity to the flammable façade of cheap jute and plaster. This threat led Burnham to beef up the fire department and water delivery infrastructure at the fair, and to adopt a more rigorous inspection regimen than he had initially planned….
“The underwriters charged Merrill with reviewing the wiring and exhibits to make sense of the electrical fire risks that the Palace of Electricity and the White City presented, including the fire alarm system and electrical components. Burnham and the electrical manufacturers jumped on board. Thomas Edison was said to have looked on with envy and trepidation as his competitor Westinghouse wired the Fair with alternating current. (Edison believed direct current to be much safer.) Merrill arrived and immediately went to work. He made notes as he followed the fire patrols around the Fair site. Merrill took an interdisciplinary approach, “bringing together the skills of scientific bench-level analysis with an engineer’s understanding of technological systems, and a businessman’s attention to profit and loss.” At least in part as a result of Merrill’s inspections, the underwriters went ahead and wrote policies for the Fair.”
Underwriters Laboratories was established, standards set, cities burned less, people were protected and assets and profits preserved, as electricity became domestic. So was solved a market failure then threatening the future of electricity usage. Can this model a climate containment approach?
Under current US government administration, little climate risk reduction has been secured through regulation. This may continue, and this uncertainty every four years limits the consistency of policy to preserve climate, needed to drive steady industrial transformation. Hence the attraction of a ‘UL’ model of non-governmental business community response to climate risk abatement. Another strength of a non-governmental, insurance-guided alliance leading climate containment is that it can appeal to and recruit libertarians and true conservatives; environmentalists beyond left and right, since this approach isn’t empowered by unilateral threat of violence, but by bilateral contract. This could open up powerful alliances.
A central feature of UL’s approach is the UL logo, identifying goods tested, certified and labeled as safe. This allows insurance customers to easily check fire safety ratings while purchasing appliances. A ‘Climate-Safe’ standard, certification and labeling program might similarly accentuate goods and services which will uniquely protect our climate in both their operation and construction. Underwriters could specify that insurers both use, and, in turn, specify ultimate customers use, only ‘Climate-Safe’-labeled goods and services, to contract for underwriting or insurance. This would allow customers to easily make informed purchases, while allowing insurers and underwriters to manage systemic climate risks affordably. Industry-wide restriction of insurance only to customers who use only ‘Climate-Safe’ goods and services will help shield customers from climate crisis, as well as reduce re-insurance losses, thus protecting underwriters as well. Any one underwriter or insurer could not independently enact such standards, yet, together, through an industry-wide organization, such a comprehensive approach makes sense.
A similar investment rating system might guide asset allocation toward ‘Climate-Safe’ investments which either do not damage or which actively repair our climate, be the investors underwriters, insurers or customers.
So beyond insurance simply spreading risk among the exposed, there exists the option of managing climate risk comprehensively; reducing risk exposure system-wide, on a planetary scale. This may make the insuring and underwriting of climate risk a profitable endeavor, if given informed, motivated customers and enough lead time.
This lead time is important because of inertia in earth’s climate system. If all industrial carbon emissions were to cease tomorrow, average world temperatures would continue to rise, as the previously emitted carbon dioxide continued to blanket Earth. Hence, through insurance rates, or duration of policy terms offered, and through volume of insurance contracted, insurers might make sure that sufficient industrial change takes place, with sufficient lead time, to modify successfully the risks against which they insure, in time to ameliorate those risks during those policies’ duration.
Unfortunately the amount of inertia – the delay in the responsiveness of the earth-industry temperature modifying system, is not well-understood. One claim is of a four decade lag in ocean temperatures, which powerfully influence world temperatures.
To allow time for climate containment to work, to lock in the investments necessary to manage climate risk, insurance policies for climate damage restitution might only be offered with insured terms of four decades or more. Or affordable rates might only start with policies longer than four decades. One development in the bond market that may ease such investment is Climate Bond Initiative’s new Green Bonds Market . The acceptance of such bonds ($257.5 billion worth sold in 2019) opens up funding for climate-crisis-containing investments to work. Beyond the duration of even century-long bonds lie perpetuities, such as the Britain and USA’s consol bonds, which pay only an endless steady stream of regular installments. These might open financial possibilities to even slower, more gradual projects for our climate, even ones without end, that merely yield a stream of benefits forever.
As industry associations might gather enough underwriter and insurer participation to systemically alter risk, so customer associations might insure enough customer participation, so that the temptation to ‘free-ride’ while others fund the climate safety that one enjoys, without participating in the expense, is limited. Hence climate insurance might be provided mostly to customer alliances, or with customer alliance education or incentive to purchase. It is also important for customers to understand that, even if there’s a climate catastrophe, insurers will pay their claims promptly, willingly and ably.
Additionally, climate insurance customers may need education to understand their exposure to climate risk, and thus the benefit of climate insurance. USA customers stand especially confused on climate risk, and compose a valuable component of the world insurance market, so a focus on USA customer education may prove worthwhile financially. If such a program were to cost 2% of USA GDP, or about $42.8 billion/year, this would not significantly affect the approaches following either the Stern Review or Project Drawdown 2020 Review’s investment guidance.
It may be possible to ‘divide-and-conquer’ fossil fuel interests. They might be divided by short-term-ism. Oil in the ground could serve as well as gold in the bank as a store of value, (with stability of ownership; without war) being thus used, yet not used up. This might complement carbon’s ‘fuel or feedstock’ roles. This could serve fossil fuel owners’ interests, but isolates the fossil fuel extraction industry, which must either pump or die – (in reality ‘die now, or pump, then die later’ in climate catastrophe, unless they convert to renewables production). Allegiances between owners and extractors seem possible rift points – their interests only align in some scenarios.
Preserving our climate can help maintain the ultimate customer’s supply of food, through agriculture, etc. This would support regular customer payments to insurers, and thus maintain insurer’s payments to underwriters.
People insure against loss of their access to services and goods, including those which a preserved climate can provide. Customers may recognize that they need assurance of continued supply of the value of these climate goods and services. They may also recognize that insurance which covers that value can help them with climate crisis risk. Climate crisis containment will more economically assure future access to these goods and services than climate crisis adaptation, as evidenced in Stern and Drawdown Reviews. So climate crisis containment, when climate crisis is both expected and insured against, presents an opportunity for the underwriting industry.
Strengths, Weaknesses, Opportunities of, and Threats to a UL-like ‘Climate-Safe’ program testing, certifying and labeling goods, services and investments:
Strengths: Independent of ever-changing government objectives, hence can maintain a steady focus on achieving climate safety. Follows a path of testing, certification and labeling well-trodden by UL, which has succeeded in the past in rendering technology safe to use. Appeals to sane right and left.
Weaknesses: Depends on accurate insurance customer understanding of climate risk, to inspire climate risk insurance purchase. Depends on consumer trust of insurance industry’s ability to, despite climate emergency, pay it’s customer’s claims. Needs an extended window of time to overcome climate change inertia, to lessen future climate damage through increased patronage of firms providing ‘Climate-Safe’ investments, products and services. Must accept some losses as ‘baked-in’; near-future sea level rise can not be reversed or avoided, for example. Diverts somewhat from the clear link between UL-listed product use and customer safety, since purchase of non-’Climate-Safe’ goods services might not be seen to directly endanger the customer who purchases them. This may be unlike UL-listed appliance purchases.
Opportunities: Educate potential customers about climate risk’s existence, and the extensive, and successful, efforts to confuse potential customers about now-likely climate damage. Explore medium-term, relatively safe climate risk reduction practices, such as carbon sequestration opportunities, etc.
Threats: Confusion in (especially American) public perception of climate risk – from purposeful confusion, to protect certain industries’ returns and existence. These agents of confusion are well-organized, well-funded and quite technically sophisticated.
This analysis may exemplify an additional risk analysis method, beyond those conventionally applied by the insurance industry, as identified by Hazel Henderson in her chapter ‘The Future of Risk, Insurance and Uncertainty’. While deductive (or axiomatic) and inductive (or stochastic) methods guided historical insurance endeavors in qualitative and quantitative means, respectively, network-analytical (or systemic) methods may reveal previously obscured risks to an extent useful to both underwriters and the broader society.
Both deductive and inductive forecasts assume linearity in response of the systems modeled, but beyond historical ranges, this assumption isn’t always warranted. Whether or not systems will behave linearly in the future can be forecast with network-analytic, or systems thinking.
For example, a standing domino may, when perturbed to a minor extent, return to a standing equilibrium in a repeatable, predictable fashion. But when perturbed beyond that range of linear response, profound changes may occur that are irreversible by simple horizontal perturbation – the domino may fall. Neither linear extension of earlier responses to smaller perturbations, nor stochastic analysis of all earlier response data together, can reveal what systems analysis can predict. This useful analysis – the domino may fall – is unavailable to those relying on other risk forecasting methods common to the insurance industry. And it has already worked:
“At least one Lloyd’s syndicate – one of the most successful, and a market leader – sought advice that went beyond the IPCC’s lowest-common-denominator conclusion. What they heard, from one of Britain’s leading climatic research teams, made them review all cover in Florida. As one of their underwriters told us recently:
“Somebody had got off the fence ….they said, if you’re asking us, yes, we think there’s a direct link, and this could have an affect on your business. …We started to incorporate the statements that we had received and the areas we had been warned about, into our whole rating base, which we are glad to say resulted in us reducing our commitments in areas like Florida. “*
When Hurricane Andrew hit, in August 1992, this syndicate saved millions of dollars. “
In Sum: Well-informed customers purchasing insurance against climate losses and damage might sufficiently fund avoidance of such losses and damage via a Underwriters Laboratories-like ‘Climate-Safe’ program, as UL listing did for fire risk from appliances. If predominant in our markets, as UL listed appliances became, this effort could transform our industrial realm to become sustainable. This concept is not original but hopefully is powerful.
Looking Forward: Let’s identify potential allies in this effort and approach them. Let’s plan to create or recruit insurance industry organizations covering enough of the market share of underwriters and insurers to succeed. Let’s review climate containment strategies, and consider climate restoration costs, benefits and timeliness. Let’s project the time limits on containing climate crisis – how much time do we have to accomplish this partnership? Let’s estimate education costs, and evaluate PR firms to do this. Let’s develop temporal inertia estimates of the earth-industry temperature system, from recent perturbation and response timing. Let’s map systemic non-linear responses of the earth-industry system to perturbation; both climate-negative and climate-positive. There are no downsides to such a system of survival.
Brian Cady earned a BS in Biology, with a Minor in Chinese, in 2002 from the University of Massachusetts Amherst. Integrating humanity sustainably with the rest of our natural world intrigues Cady, who blogs at hopefulvision.blogspot.com and is a member of the Global Advisory Board of Ethical Markets Media, a Certified B corporation.
 https://www.forbes.com/sites/energyinnovation/2019/05/22/the-global-insurance-industrys-6-billion-existential-threat-coal-power, https://www.theguardian.com/environment/2019/mar/21/climate-change-could-make-insurance-too-expensive-for-ordinary-people-report
 Engineering Progress, https://www.ul.com/sites/g/files/qbfpbp251/files/2019-05/EngineeringProgress.pdf :5
 Ibid. : page 7
 Ibid : page 10
 Henderson, Hazel, ‘The Politics of the Solar Age’ Anchor Press 1981: 322
 Leggett, Dr. Jeremy ‘Climate Change and the Insurance Industry: Solidarity among the Risk Community-2nd Edition’, GreenPeace, May 24th 1993. :page 29