Climate Engineering: The Insurance Perspective—Challenges and New Models
“If a tree is saved even at the cost of one’s head, it is worth it.”
These were the last words of Amrita Devi Bishnoi, said before she was beheaded in the Khejarli massacre on Sept. 11, 1730, while trying to protect a grove of Khejri trees in Khejarli, Rajasthan, India.
—Amrita Devi Bishnoi
CLIMATE CHANGE IS ALREADY PRESENTING SIGNIFICANT CHALLENEGES FOR THE INSURANCE INDUSTRY. Many risks are becoming uninsurable as their severity increases and the probability of losses is becoming incalculable.
The global fraternity is considering climate engineering as a potential antidote for climate change. It is important to note that, like climate change, climate engineering will also interact with the same earth and climate systems to achieve reversal and positive change. Therefore, it is expected to affect every risk relevant to the insurance industry.
This article discusses the challenges that the insurance industry will face in providing coverage for climate engineering companies and the necessity for new models.
Insurance challenges
The effectiveness and associated risk pathways of climate engineering could lead the insurance industry into uncharted territory. Some of the adverse effects and the risks arising from them could present new challenges to the insurance industry, necessitating a reevaluation of the ways it has always operated (see Figure 1). This will entail redefining some of the fundamental insurance principles and traditional processes.
Acts of God? Not anymore
In insurance, “acts of God” refer to all inevitable events caused by elemental forces of nature. Catastrophes such as earthquakes, floods, hail, lightning strikes, tornadoes, wildfires, windstorms, and other natural phenomena fall into this category. Despite ongoing climate change being termed anthropogenic, resulting catastrophes are not labeled as human-caused.
Insurance companies adopt various approaches when providing coverage for acts of God. While most claims arising from acts of God are paid, they are denied if there is any human involvement. Unless the coverage is explicitly excluded for certain perils, the losses are generally covered under both personal and commercial insurance policies.
Climate engineering has the potential to alter climate and weather patterns or inadvertently lead to unforeseen catastrophes, thus fundamentally changing the current understanding of acts of God. Ironically, the deployment of anthropogenic climate interventions could trigger “natural” disasters. As a result, risks traditionally considered as driven by chance, including acts of God, may no longer remain so. This would pose challenges to insurers in assessing and insuring climate and weather-related risks. It will be necessary for insurance regulators to clarify the process for handling claims arising from these human-caused “natural” catastrophe events. Insurers will need to appropriately recalibrate their risk models and the costs associated with insuring such perils.
Modeling nightmare
The insurance industry, a cornerstone for risk management, relies heavily on risk models for decision-making. Risk modeling involves the use of mathematical and statistical techniques to quantify the impact of risks and potential loss. Catastrophe risk models consist of distinct modules for evaluating stochastic events, hazards, intensity, and vulnerability to various perils. Building climate models is extremely difficult as the complexities of Earth and climate systems—and their interactions—are less understood. The insurance industry builds these models using historical risk datasets and recalibrates them with ongoing data to enhance accuracy. Despite this, insurers struggle to accurately predict the potential losses from natural catastrophes. This challenge arises because the available datasets are only a few centuries old and lack examples representing all outlier scenarios resulting from climate change. The rise in the frequency and severity of such outlier catastrophes makes all predictions and calculations go wrong.
Climate engineering approaches, their effectiveness, and the complex interactions they may have with Earth and climate systems, as well as their potential adverse effects, are all hypothetical. The ability of climate engineering to either pause or reverse ongoing climate change remains unproven. The nature and scale of adverse effects resulting from deployments are uncertain and unquantified. The adverse effects could stem from various factors, including climate engineering, climate change, or their confluence. They may arise from individual, simultaneous, sequential, or long-term deployments, occurring immediately or with time delays, impacting national or transnational territories, and affecting short-term or long-term outcomes.
The primary challenge for the insurance industry is the lack of any credible loss history or data to build models for risks associated with climate engineering solutions. Insurers must create new catastrophe models that incorporate all the hazards and perils related to different climate engineering solutions, their effectiveness and risk pathways, along with how they might influence these perils. Given the complexities involved, insurers must maintain rational and conservative expectations regarding the effectiveness of these models. They may need to consider worst-case risk scenarios while pricing for these risks.
Liability conundrum
Commercial enterprises need liability insurance to safeguard their businesses from risks for which they could be held legally responsible or sued for negligence, malpractice, or injury. The primary forms of liability insurance include public, product, employer, and third-party liability. Many liability risks associated with normal business operations of climate engineering may align with those of other industries. However, the potential liability for adverse effects of climate engineering could be highly complex and require distinct interpretation and treatment. Liability claims that arise could present entirely novel challenges for the insurance industry, unlike any seen before.
In other industries, companies may not be intentionally adding something to the environment to modify it. Accidents like oil spills or gas leaks can occur as an accident while performing their core operations. Existing environmental liability insurance products typically provide coverage for bodily injury, emergency expenses, environmental damage, property damage, and third-party claims. They also cover costs related to government-mandated cleanup efforts and legal fees arising from contamination or pollution incidents. Insurance policies do not extend coverage to deliberate pollution, such as the release of untreated effluents or mercury contamination.
In contrast to other industries, the primary activity of climate engineering companies is to modify Earth systems by adding or removing substances to alter the climate. Thus, what may be considered pollution in other contexts forms the fundamental business proposition here. While these companies operate with commercial interests, their initial defense against any liability claim would likely emphasize their compliance with governmental approvals for the betterment of the planet, asserting that their actions were undertaken in good faith. A secondary defense might argue that the benefits anticipated at the time of deployment outweighed the risks. A tertiary defense could be that they cannot be held liable as the risks were unforeseen, and therefore, they could not have taken preventive measures. Faced with this predicament, insurers must decide whether to provide coverage for instances where such propositions lead to adverse outcomes. An argument could be made that since climate engineering deployments aim to benefit the planet at large, governments should bear some liability risk.
Another crucial aspect that requires discussion is how to finance the risks arising from climate engineering deployments. I believe that, in due course, there will be large-scale deployments of climate engineering approaches. Given the nature of these activities, any climate engineering company whose solution could potentially cause any adverse effects will likely be permitted to operate only after appropriate governmental approval and strict adherence to governing principles. The legal validity of the businesses empowers them to obtain insurance coverage for the risks they face. However, the uncertain nature of the risks and their potentially greater complexity, frequency, and severity may lead to insurance companies to hesitate in providing coverage, necessitating governmental support.
It may be relatively straightforward to associate risk and liability to a company for an isolated individual deployment or a sudden event, such as sudden CO2 leakage or an earthquake. Typically, standard life, health, auto, and home insurance products cover claims for acute harm, injuries, and damage caused by such events. However, it will be difficult to prove the association and the corresponding liability when the cause involves climate engineering deployments (whether simultaneous, sequential, or long-term), climate change, or their confluence. Even if the joint liability of multiple deployments is identified as the cause, it will be difficult to ascertain the proportionate liability. Climate engineering companies might be blamed and held accountable for all extreme weather events that occur randomly and naturally.
The challenge becomes more complex when the adverse effects are transboundary in nature. The Outer Space Treaty and Space Liability Convention currently provide a reference framework for governing transboundary risks. According to these, a state or a group of states responsible for launching a space object is internationally accountable for compensating any damage caused by the object on Earth or its faults in space, regardless of whether the activity was conducted by a governmental or private entity. The only instance where the treaty was invoked was in 1978, following the crash of the nuclear-powered Kosmos 954 naval surveillance satellite launched by the Soviet Union. The satellite crashed into a remote area of Canada’s Northwest Territory, spreading radioactive debris from its onboard nuclear reactor across vast regions. A joint Canadian/American team conducted the clean/up, which cost over CAD $14 million. (Although the Soviet Union was asked to compensate CAD $6 million, only CAD $3 million was paid.)
From the perspective of climate engineering, complications could arise when a few multinational companies dominate the industry and deploy solutions from states that are geographically well-positioned for such deployments. If these countries are already impoverished, they may lack global standing, technical acumen, or financial resources to defend the liability claims. This raises the fundamental question: Is it the company or the state that is to be held accountable for all failed deployments? This quandary underscores the need to revise transboundary liability principles in the context of climate engineering. Furthermore, it may be challenging to establish causation, pinpoint the contribution, and assign financial liability when climate engineering is blamed for a catastrophic weather event. Filing a liability claim against a company for causing a storm, flood, or earthquake in a region would be unprecedented and previously unthinkable, thus falling outside the scope of existing liability laws. Lawmakers must decide whether to allow such claims or dismiss them as frivolous. In many cases, resolution would involve protracted arbitration and lawsuits. Even if claims are accepted, the relief or compensation awarded may not fully cover the actual losses, resulting in a significant gap.
The long-tail problem
In insurance, “long-tail risk” refers to risk exposures where claims may arise long after the occurrence of the underlying event. Companies involved in such risks could face lawsuits under negligence, strict liability, and/or breach of warranty. Long-tail claims typically have extended reporting periods and may take several years or decades to develop, settle, or resolve. Examples of long-tail claims include those related to exposure to asbestos or lead. For insurers, predicting, pricing, reserving for, and managing exposure to these risks can be challenging due to their unpredictability.
However, the long-term liabilities arising from climate engineering will likely be even more difficult to predict, as there is currently no existing data on the types of risks they will create.
Companies involved in [long-tail] risk could lawsuit under negligence, strict liability, and/or breach of warrenty. Long-tail claims typically having extended reporting periods and may take serval years or decades to develop, settle, or resolve.
Existing environmental liability policies typically provide coverage for the costs associated with cleaning up or reversing the adverse effects. They also cover legal expenses and payment of compensation to the affected parties. However, losses resulting from adverse events such as changes to precipitation, hydrological cycles, weather patterns, or multiyear flood or drought conditions are likely to be substantial. The unpredictable cause-and-effect relationships associated with these risks make it difficult for existing long-term liability policies to model them effectively. As a result, insurance companies may find these risks unmanageable. Considering that the primary aim of climate engineering companies is purportedly the improvement of the planet, it will become crucial for lawmakers to determine whether it is necessary to grant immunity or exclusivity from such long-term claims.
On a different note, if the loss or damage is localized and/or the claims are made within a reasonable period, it may be relatively straightforward to hold the companies responsible, and insurance companies may find it viable to settle the claims. However, if the magnitude of liability claims is high, if they arise several years after the deployment, and/or if they are transboundary in nature, insurance companies may find it difficult to support them. This challenge in insuring such long-tail risks may necessitate the establishment of new hybrid risk-sharing arrangements involving climate engineering companies, the insurance industry, and governments. While the insurance companies provide coverage up to a certain threshold amount, governments may need to extend support beyond that threshold.
Evolving insurance models
Climate finance, a new discipline that has evolved in the recent decades, refers to local, national, or transnational financing for supporting mitigation and adaptation actions to address climate change. Over the years, several sovereign risk pools such as Caribbean Catastrophe Risk Insurance Facility (CCRIF), African Risk Capacity, the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI), and the Southeast Asia Disaster Risk Insurance Facility (SEADRIF) have been established to manage and mitigate the risks. As climate engineering becomes more mainstream, the purpose of climate finance must expand to accommodate both investments in climate engineering and compensating for the risks associated with the deployments. The private sector is expected to play a significant role in climate engineering deployments. These companies will have to obtain proper prior approvals from their respective governments to operate. Although climate engineering companies will have commercial interests, the activity is generally perceived as being undertaken for the common good of the planet. The adverse effects of the deployments are hypothesized to be complex, severe, and/or unpredictable. This could require governments to do more than grant approval and monitor the activities. They may need to become active stakeholders in risk management. In scenarios where the insurance industry struggles to provide coverage, government intervention may be necessary to compensate for the damages and losses. This would entail the evolution of new sovereign insurance models.
The complex ways in which climate and Earth systems work and interact pose significant challenges for both claimants and plaintiffs in proving that an individual or a set of climate engineering deployments caused a specific weather catastrophe. It would be difficult for insurers or defendants to definitively prove or disprove whether the contested climate engineering deployment was the proximate cause of the disaster. In cases where the adverse effects are transnational, the claims could become entangled in geopolitics and drawn into prolonged arbitration and lawsuits. Providing coverage for risks characterized by extreme complexity, severity, litigation, and/or long-term consequences could potentially lead insurers to insolvency.
To compensate for such losses, a multilayered protection structure needs to be established. The primary layer of protection for the risks occurring within a country would be creating appropriate insurance propositions at micro, meso, and macro levels. In situations where an entire region is affected, the respective government and the insurance industry must collaborate to create risk pools like that for nuclear risk to finance the associated risks. For transnational, time-delayed, or long-tail risks, a secondary layer of hybrid protection must be developed by governments and insurers. This secondary layer could take two forms: first, established by entities deploying climate engineering approaches, and second, by those likely to be affected by these approaches.
When the Global North deploys climate engineering, the individual nation or group of countries involved will be held responsible for the risks caused to the Global South by their deployments. These deploying countries will be obligated to establish a sovereign liability insurance pool to cover these losses. Parametric insurance pools, such as CCRIF, are proposed to be established by the countries deploying climate engineering. However, parametric insurance is subject to basis risk, wherein the insurance claim payout may not match the actual loss incurred. Given the challenges in accurately ascertaining the cause, these claims might be disputed, leading to a delayed or denied relief or compensation. This could hinder the recovery and restructuring process. Moreover, history has shown instances of companies exploiting their advantageous positions to downplay damage or loss and evade liabilities following a disaster. A similar scenario could arise with respect to climate engineering if a cartel dominates the global market. Considering these obstacles, it would be prudent for the affected country or a group of countries to establish their own sovereign insurance pools, like CCRIF. The risks and losses faced by commercial organizations from these affected regions may be extensive and distinct from those suffered by individuals. The risks and losses faced by commercial organizations from these affected regions may be extensive and distinct from those suffered by individuals. The premiums of the existing commercial insurance products may increase to match the risk or insurers may find it economically unviable to provide coverage. Therefore, hybrid sovereign insurance arrangements must evolve within the commercial insurance space to offer coverage.
Being practical
Climate scientists and the global fraternity are expressing a sense of optimism regarding climate engineering. This techno-optimism could lead the global fraternity to view climate engineering solutions as a primarycourse action plan rather than just a peak-shaving exercise. However, this optimism is based on unrealistic assumptions about certain fairy-tale technologies and the belief that Earth and climate systems are predictable. It is important to remember that even small variations in the global temperature, whether positive or negative, can lead to significant changes in the global climate. The last time such a severe change occurred, human civilization had not yet begun. This indicates that humanity lacks knowledge or experience about the manifestations of climate change or how to reverse it using climate engineering. Any progress regarding topics related to climate change, including mitigation, adaptation, and climate engineering, hinges solely on a globally unified will and action plan. However, there is already a noticeable lack of collective response. This shortfall can be attributed to various factors, such as geopolitical tensions, rising nationalism, rampant capitalism, and profound economic inequality. The collective decisionmaking process for deploying climate engineering is also likely to encounter the same challenges. It would be unrealistic to expect all countries to suddenly overcome their inherent barriers, come together and start singing “kumbaya.” The multipolar hegemonies could potentially hijack the need for a collective response and try to commercialize the technical expertise to deploy climate engineering or counter climate engineering. Non-cooperation could impede the establishment of standards, regulations, and governance needed for effective climate engineering deployment.
Insuring an engineered world
While it may sound preposterous and challenge our collective wisdom, there is a possibility that all the climate models could prove to be wrong. This is because it is impossible to simulate and construct accurate models for phenomena about which we lack complete knowledge, such as climate change and climate engineering. Even if we try doing it, it is practically impossible to validate those models without historical data. At best, we can make subjective estimations of potential events, construct objective narratives around them, and await real-world outcomes. To navigate this uncertainty, insurance companies must adopt a bricolage strategy—making the most of available resources and remaining flexible to adapt swiftly to challenges that are poorly understood or dynamic. This stands in contrast to the traditional strategy of following a structured and well-defined path where risks are reasonably understood, assessed, and priced. Given the uncertainties, insurers can only assess climate engineering-related risks based on existing or assumed information. Therefore, it is crucial for the insurance industry to keep climate engineering on their risk radar and monitor developments in the field—including research, governance, and regulation—to stay informed about potential risks and opportunities.
It is important to recognize that the impact of climate engineering on insurers will vary depending on the specific methods used, their effectiveness, and deployment strategies. As climate engineering deployments increase in number and scale, new data will emerge regarding their effectiveness and adverse impacts. Therefore, the insurance industry and governing bodies must collaborate to collect risk data, quantify risks, develop effective risk models, and design appropriate products and services.
Next Up
The next article in this series will discuss the effectiveness and associated risk pathways of climate engineering from an insurance perspective.
SRIVATHSAN KARANAI MARGAN works as an insurance domain consultant at Tata Consultancy Services Limited.
