3. What about the state?
While the insurance industry has shouldered losses amounting to US $1.35trn since 1980, that is only one third of global extreme weather losses – the remainder of which is subsidised by governments4.
Governments’ role brings into sharp focus the trade-off between affordability and behavioural change. Affordability necessarily undercuts the actuarial calculated market rate, but below-market pricing fosters moral hazard, by distorting the real risks and costs associated with living in high-risk regions. For example, the availability of the Disaster Relief Fund in the US has arguably had the unintended consequence of encouraging migration patterns that do not fully price in the risk associated with living in high-risk regions.
Ultimately, the compounding effects of more frequent extreme weather events make government subsidies unsustainable, particularly as they become more expensive in light of inflationary forces.