Title: Uncertain climate change, increasing risk, and mutual insuranceUncertain climate change, increasing risk, and mutual insurance

Abstract

Besides the Covid Crisis , two further challenges are confronting us: the demographic development and climate change. While the demographic development is – as seen by most demographers – a well-known process with only small risk, the climate change is – as seen by most scientists – governed by huge and increasing risk. This involves not only the questions of discounting the distant future and with which interest rate, but also the (unknown) techniques of abatement of environmental damages. Or – as Martin Weitzman (2009) has pointed out – what is the “appropriate way to represent the the damages from global warming” (ibid, p. 1)? Furthermore, should the damages done to the environment be treated multiplicatively (and are thus substitutable with other goods, meaning e. g. that climate changes “drive up only the prices of food or increase the demand for air conditioning” (ibid)? Or should the damages be treated additively in the (social) utility function where the “impact of climate change is on things that are not readily substitutable with material wealth, such as biodiversity and health”? In the end this leads to Probability Density Functions (PDF) with very fat tails such “that its variance is effectively infinite” (ibid, p. 8). To control these processes, sophisticated insurance (or risk management) products are called for. And here, mutual insurance comes in, especially when the risks are large, probabilities unknown, and events correlated! In the following the advantages of mutual insurance are shown with respect to these “cascades of uncertainties” (Weitzman, 2009).