Insurance & Reinsurance: The Superego of Adaptation

This month, we will host the first in a series of webinars that explore how major parts of financial and economic systems see and address climate adaptation and resilience, beginning with a 9 April webinar on insurance and reinsurance. You might in turn wonder why this issue and why now? I want to answer by talking about my job as a parent.

Once my son began walking and talking, I realized that I had an uncomfortable role in his life that I had never experienced with another person: I was his superego.

If you haven’t read a lot of Freud, superego is the psychoanalytic term for our internalized “authority figure” voice exercising caution and restraint and enforcing moral and legal restrictions. The superego is the voice in our head that provides a stern “no.” I’ve never had a great relationship with my own superego, so being someone else’s anticipatory reprimand has been... uncomfortable.

And my son hears me give voice to his superego quite regularly: he’s interested in sports that have historically had a high rate of head injury. He’s interested in motorcycles. He can plunge into sensitive situations in insensitive ways. (He’s also 14 and age-appropriate in his behavior!) My words are meant to provide loving guidance, but sometimes I also need to simply say no, don’t argue with me. My job as parent also reflects that he and I have a fundamentally different sense of risk and hazard.

When I took my first job in 2007 focused on climate adaptation and resilience, my first priority was to develop a sense of best practices around how we diagnose, see, and assess climate risk. In many ways, that’s still at the core of my work. Indeed, how we see climate risk is how we articulate the superego of adaptation.

The world of finance and economics is still pretty new to climate adaptation and resilience. Economists and finance specialists are adept practitioners at anticipating all kinds of risks. So in a sense, they should have been prepared for climate change all along, no?

The point is arguable, but a growing number of economists and finance specialists are worried that we are seeing novel risks — indeed, that we may be entering a period in which the novelty of risk is itself a norm. Applying old tools to new risks likely means economic danger.

We’re beginning this series with insurance and reinsurance precisely because the finance sector is built on the systemic diagnosis of seeing and understanding risk. A core concept in the industry is that of sharing risk — spreading the potential damage or penalties of a failure across many shoulders. A loss to a flood or fire from one householder or farmer is unlikely to have a significant impact on the economic feasibility of a government or commercial insurance program because risk is shared across a wide range of ratepayers and clients as well as investors. And similarly, insurance can incentivize preparation on the part of clients and public authorities, helping vulnerable populations move away from hazards or help them prepare against hazards. Insurance has even become active in the nature-based solutions space as systemic approaches to risk reduction have become more popular.

However, the insurance industry itself may be unprepared for what is coming (and perhaps for what is here). Climate change changes our risk calculus if our ability to prepare for larger or more frequent or new types of hazards emerge. Sea-level rise is probably the easiest example: the insurance industry faces a conundrum in how to cope with existing and future clients as oceans move inland. Likewise, if a drought is not a temporary event but a new normal, should insurers withdraw from the market of offering drought protection? A colleague long employed in the insurance industry recently said to me, I am interested not just in how we share and transfer risks but also in how we see and understand risks. That’s the perspective we need right now. New tools that can see new risks and place them in a framework that can continue to enable cooperative, equitable, and positive economic activity.

Click below to register for the first webinar!

With all due respect to my son, I’d say that insurance is our climate risk superego, telling us when we make a good choice, reinforcing our effective decisions, and providing a stern no. We may need to hear hard statements: don’t go there, we don’t have your back, we don’t support that move. We won’t share that risk. That’s a useful superego.

Insurance has a critical role to play in a resilient economy, and we need to ensure that the insurance industry’s quiet, compelling voice is clear, useful, resonant, and forward looking.

John Matthews

Corvallis, Oregon, USA