For insurers, a hotter world is also a less certain one. Not only are the probabilities of outcomes not known—the likelihood, say, of hurricanes in the Caribbean ten years from now—nor is the damage they might do
Most people plump for the first urn both times, despite such a choice implying that there are both more and fewer red balls than in the second urn. This fact is known as the Ellsberg paradox after Daniel Ellsberg, a researcher at thecorporation, a think-tank, better known for leaking documents detailing America’s involvement in the Vietnam war. Ellsberg, who died on June 16th, called the behaviour ambiguity aversion.
In May State Farm, California’s largest home-insurance provider, retreated from the market altogether, citing the cost of “rapidly growing catastrophe exposure”. Gallagher Re, a broker, estimates that the price of reinsurance in America has increased 50% this year after disasters in California and Florida.
The task of setting the appropriate price is made even more difficult by the fact that, in the language of economists, a warming world faces “uncertainty” as well as “risk”. John Maynard Keynes described uncertainty as a situation where there is “no scientific basis to form any calculable probability whatever”. He gave the example of predicting the likelihood of a war in Europe or whether a new invention would become obsolete.
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