Adapting to a Hotter, Riskier World

In climate-speak, “mitigation” refers to actions that lower emissions that increase the total amount of greenhouse gases, slowing the rate or level of human-caused global warming and addressing the root causes of climate-related risks.

In contrast, adaptation involves adjusting to current or projected climate conditions to reduce harm or capitalize on its beneficial opportunities. It modifies exposure or vulnerability to potential future losses and damages, such as upgrading infrastructure, strengthening building codes, retrofitting high-risk structures, enhancing early warning systems and increasing risk awareness to better align lives or the environment with climate-related risks. These actions, if taken before, during, or after the risk occurs, can reduce resulting damage and loss.

Climate-related risks can be categorized into sudden (discrete, sometimes catastrophic) events and slow-onset (steady, often gradually worsening) conditions. Examples of the former include hurricanes, floods, and heatwaves; examples of the latter include sea-level rise, desertification, multiyear droughts and the spread of certain infectious diseases. These are sometimes collectively referred to as events that result in damage and loss from climate-related risks, even though their occurrence and effects can be felt over a long period.

I believe adapting to climate risks should be a key part of risk management plans for governments, businesses and households. A NASA report shows that tropical cyclones (hurricanes), heatwaves, wildfires, floods, droughts and winter storms have become more severe and, in some cases, more frequent in recent years. Worldwide, this has increasingly threatened health, property and economies.

Although mitigation and adaptation are important for managing climate risks, mitigation has often taken the spotlight, partly because it usually involves public policy at a global level and is more straightforward. Additionally, most corporate disclosures about climate risks, in my observation, focus on mitigation efforts. However, because many climate risk damages differ by location, many entities may be more directly affected by climate risks, which can be addressed through adaptation and resilience-building. Ultimately, I believe mitigation and adaptation should complement each other rather than compete.

This article discusses key issues related to the importance of adaptation, building resilience to reduce loss and damage and the existence of an adaptation gap.

TYPES OF ADAPTATION

Two types of adaptation can help reduce adverse effects and damage from both direct and indirect climate-related losses. They can be distinguished by their timing.

1. Ex-ante adaptation actions take place prior to an event that could cause damage or loss. These actions can be a) public sector (government) actions or guidance, such as strong building codes and zoning restrictions; b) community actions, such as providing local cooling centers; and c) household and business actions (e.g., installing home air conditioners and building on high ground).
2. Ex-post adaptation actions occur during or after an event. These include public sector/government actions, such as providing community support to those currently suffering, providing transportation and improving living conditions for those who cannot afford them on their own. Information from implementing these measures may be used to better plan and control damage from future risks. In some cases, closing the insurance gap can help address financial losses resulting from these events.

There are also hybrid approaches that can combine these two types—established before an event but implemented only after the fact. For instance, risk pools, contingent credit lines and the option to defer debt payments after disasters to free up funds for recovery, such as Jamaica’s multilayered disaster risk financing system.

Examples of ex-ante adaptation techniques include better insulating older buildings, imposing insulation standards for new buildings, adopting land-use and building resilience codes, planning for short-term risks through evacuation plans, and for long-term risks through emigration, introducing more efficient air conditioning systems, increasing the use of insecticide-treated bed nets, using hardy hybrid crops, enhancing disaster-response planning and healthcare infrastructure, using coastal infrastructure such as dykes to hold back sea or river levels or surges and resettling populations when needed.

Adaptation actions can take the form of high- or low-technology techniques, including critical infrastructure improvements that enhance human capital through (re)training and effective public education. Effective urban planning and financing (including an increasing number of heat and water conservation plans, such as Texas Propositions 4 and 7, which provide for water and wastewater infrastructure, conservation and loss mitigation) and forest management are useful examples of long-term risk management programs. It is advisable to have comprehensive disaster planning that covers plans and resources for both ex-ante and ex-post climate risk-related programs. These plans could be developed on a regional or area-wide basis, as these risks do not follow neat borders.

Government incentives can be direct (such as public investments) or indirect (such as subsidies and information provision). They can play a significant role in promoting adaptation measures. However, subsidies require careful implementation, as markets for related goods and services may be inadvertently harmed.

MALADAPTATION

No discussion of adaptation is complete without acknowledging the risk of maladaptation, in which poor design and implementation can increase damage rather than reduce it. One example is over-reliance on air conditioning to manage extreme heat, which may reduce ill health and mortality in the short term but, over time, can raise urban temperatures, undermine mitigation efforts, discourage more sustainable or technological solutions and offer little help to low-income households.

Another example is the construction of a sea wall, which might benefit one community but could worsen conditions for others and create a false sense of security. These examples highlight the importance of also evaluating how adaptation measures affect other stakeholders and risks. Adaptation is not a one-size-fits-all risk management approach.

THE VULNERABLE

Two critical concepts in identifying and addressing climate risks to vulnerable areas or populations are exposure and the sensitivity of the property or people involved. Together, these concepts constitute vulnerability to a specific risk.

1. Exposure. The extent and type of exposure can affect the amount of loss and damage. For example, property, households and individuals can differ in their exposure to risks by geographic area. A building near the ocean or in a low-lying area may be at high risk of flooding. It may also be more vulnerable if its neighborhood has weak infrastructure and has not adapted to new conditions. Individuals who wear protective clothing and use effective sun protection are less likely to experience skin disease and insect bites. These risks do not respect property or country borders—working together is important.
2. Sensitivity. Two examples of sensitivity are 1) an older building can be subject to more significant damage if it is well constructed, and 2) the health of a frail individual or one with pre-existing health conditions can be more sensitive to the effects of a heatwave and high humidity than a healthy individual. Loss sensitivity depends on many factors, including location, the extent of advanced planning (i.e., ex-ante adaptation), the ability to withstand damage, the preparedness of accessible healthcare and related infrastructure, the adoption and implementation of effective and affordable land-use standards, building resilience and plans to assist those with poor mobility. A person or property that may not be especially sensitive to minor deviations from average conditions can become quite sensitive to extreme conditions. In addition, the more prepared the appropriate public sector is, the less sensitive applicable properties and public health are to extreme conditions.

Research shows that barriers to effective adaptation include affordability, limited funding, lack of relevant risk information, and political or legal impediments. This has led to substantial adaptation gaps, due to inadequate resilience to control damages and insufficient insurance coverage to maintain sustainable management of climate-related risks, that is, both ex-ante and ex-post adaptation risks.

Those of lower socioeconomic status may be more vulnerable to damage and loss from climate-related events than those of higher socioeconomic status. Significant social justice issues may also arise from certain adaptation solutions, with socially marginalized groups often facing disproportionate exposure to risk and affordability problems. As this article shows, those with higher incomes will inevitably be able to afford more effective adaptation measures than those with lower incomes; this may ultimately create further inequality.

For example, a U.K. assessment of future flood risk found that those living in deprived areas, as measured by income distribution, will suffer disproportionately as flood risk worsens. Another study found that, in Phoenix (widely described as “America’s hottest large city”), neighborhoods in the lowest 10% of the income distribution, on average, are 2.5°F hotter than those in the top 10%. As this study shows, large thermal inequities exist across 20 Southwestern U.S. metropolitan regions; in urban areas, many landlords have limited incentives to adapt to climate change. Affordable approaches could be designed to benefit those who are vulnerable, such as well-placed public cooling centers for those without air conditioning in areas subject to extreme heat.

If a household must choose between paying rent and turning on their apartment’s air conditioner, a tenant is likely to prioritize rent. Thus, not only is the availability of air conditioning necessary, but the willingness and affordability to use it are also important. I believe the pressure to lower housing costs will make new construction more difficult for new housing to be more climate- and environmentally risk-resilient. The push to keep house prices down has resulted in skimping on safety features, which may, in turn, lead to increased loss and damage.

In some areas, resilience to potential flood and wildfire damage is beginning to impact sales prices. For example, flood risk indices on a scale of 1 to 10 are being used on some real estate websites, such as Realtor.com and Redfin.com. However, how best to rate a home’s exposure to these risks remains unresolved. The use and influence of such indices are likely to grow in importance. For example, New York legislation requires flood risk disclosure when buying a residence.

Resistance and resentment over having to make changes may arise if consumers are required to make costly or inconvenient adaptations to their homes. This is especially, though not exclusively, the case for those in low socioeconomic situations or in inner cities and rural areas. Understanding population composition and distribution is critical to assessing the vulnerability of specific groups. In contrast, collaborative efforts to address and spread the cost of ex-ante adaptation may ultimately help reduce inequality. Community insurance, it appears to me, is one approach to addressing this.

Establishing effective early warning systems for climate-related events such as extreme temperature, precipitation, air quality or storms can be especially effective in reducing exposure to mortality and morbidity risks. These systems include such methods as cell phone apps, wearables or sirens, depending on the risk type and location. They need to be effectively maintained and enhanced as relevant new technology evolves. Of course, this assumes that people promptly respond to these warnings.

Assessing potential adaptation measures is best approached holistically. Although resilience often refers to physical resources (such as a personal or business residence), it can also apply to human health and financial stability, with the latter potentially requiring increased savings or sufficient insurance coverage to withstand the aftermath of a disaster. This approach can help sustain households, communities, or businesses and support entrepreneurial efforts in green and clean technologies.

Despite the focus on the most vulnerable populations, those outside these groups may also be affected. In fact, some climate-related risks may impact individuals with high socioeconomic status just as much as those with lower socioeconomic status. Here are five examples:

1. Smoke (particulate matter) and fire from wildfires can affect everyone, especially people living near forests.
2. Sea-level rise. Who is purchasing beachfront property? Often, they are financially secure. In the near future, some investments near the ocean may decline due to sea-level rise and land erosion.
3. Extreme weather events, such as hurricanes, can impact both the rich and the poor equally, although the wealthy might have more protection due to better-built buildings.
4. Those who work outdoors, such as in construction, agriculture or other physically demanding jobs, may be exposed to extreme heat or pollution.
5. As life expectancy increases, the number of people with multiple health conditions grows, and those who are very old tend to have a higher income. Although they may have access to better healthcare and may be of better general health, the more affluent may face just as large mortality risks, including heat stress, infectious diseases, and respiratory causes of death.

ACTUARIAL INVOLVEMENT

Actuaries can be involved with several types of climate risk issues that can be impacted by adaptation. Here are two examples.

1. Morbidity and mortality. It is often believed that the most vulnerable are the very old and the very young. While this is often the case, it does not mean others are safe. When assessing the benefits of an adaptation investment, it is important to consider mortality, disability, and healthcare risks. This approach differs from the planned actions of the U.S. Environmental Protection Agency (EPA), which, as of this writing, has considered changes to how health benefits and mortality are quantitatively incorporated into regulatory cost-benefit analysis; for example, benefits from reducing two of the most widespread and deadly air pollutants (fine particulate matter, PM2.5, and ozone) when regulating industry emissions.
2. Property insurance. Obtaining relevant and reliable data to assess how adaptation affects property or other casualty coverage can be challenging. Historically, underwriting these risks has relied primarily on judgment. In the future as conditions evolve, it may be difficult to gather such information to support these credits.

There is a dearth of relevant and reliable data on the effectiveness of adaptation measures. This can increase financing costs and may lead to suboptimal decision-making, especially over the long run. Such data, as brought forth in this report, could be considered a public good and sharing it more widely, whenever possible, could help improve decision-making.

Scenario testing is a valuable tool for analyzing adaptation efforts. As the old saying goes, “Hope for the best, but plan for the worst.”

I believe insurance can play a significant role in managing many household and business risks through premium credits and effective coverage design. However, if not handled carefully, it could also have negative effects, such as moral hazard and affordability issues, which may require public-private cooperation. Insurance works best in stable risk markets.

It also needs to be noted that many adaptation measures can be quite expensive, leading to affordability concerns that have contributed to a large adaptation gap, especially for low-income households, small businesses and budget-constrained governments. Nevertheless, both ex-post and ex-ante adaptations are needed.

As the Global Commission on Adaptation report shows, the overall rate of return on investments that can significantly improve resilience is quite high, with benefit-cost ratios ranging from 2:1 to 10:1, and sometimes even higher. Cost-benefit analyses of projects or investments aimed at building resilience to climate-related damage should also account for externalities—that is, benefits that can address other risks, such as improving overall emergency response or strengthening general healthcare infrastructure.

I believe it’s important to assess these risks and adaptation measures within specific contexts, including the vulnerability of the target population and available resources. Additionally, risk diversification can help offset many risks associated with over-concentration, which is one purpose of insurance.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

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