Why people struggle to understand climate risk

#EllsbergParadox Sheds Light on #ClimateChange #Insurance Key Takeaways:

• Ambiguity aversion challenges rational decision-making in climate risks.
• Insurance, as a tool for climate adaptation, faces mounting hurdles.
• Actuarial precision and policy interventions are critical for climate resilience.

Further Insights

1. Key Experiment: The Ellsberg Paradox demonstrates how ambiguity aversion, preferring known risks over unknown ones, affects decision-making.

2. Climate Challenges: Uncertain outcomes and damages of climate events, like hurricanes, make related risks extremely expensive or uninsurable.

3. Insurance Retreat: State Farm's withdrawal from California exemplifies how growing catastrophe exposure is impacting insurance markets.

4. Adaptation Tools: Insurance not only provides recovery means for disaster victims but also encourages risk-based adaptation actions.

5. Uncertainty vs. Risk: A distinction is drawn between uncertainty (unpredictable events) and risk (events with known probabilities), complicating climate adaptation.

6. Models and Realities: While climate models reduce some uncertainties by predicting disaster probabilities, policy unpredictability still poses significant challenges.

7. Policy Constraints: Regulations that prevent the use of the latest climate models for insurance pricing can undermine effective risk management.

Closing Thoughts: How can businesses and policymakers collaborate more effectively to integrate the latest scientific evidence into practical, sustainable insurance solutions for climate resilience?