บทถอดความฉบับเต็มของ Is the Future Insurable?

of course, is that the Jet Stream. Shift so you get a lot more potential winter rain. Yeah, we're you know, headlines in the local newspapers and you know publications across the state are, you know, what how big will the storms be? Will they come in December? Will they come in, you know, January? So there's already lots of of preparing for those potentially big storms here in California. And with that, let's talk about our episode today. So right now in California. Insurable has become a very loaded word. We describe something as insurable or not. We're really worried about losing insurability. So we thought today we'd unpack what we really mean by insurable. What does it take for a risk to be insurable in the first place? Where did that come from? And are we hitting limits to insurability? And if so, what does that mean and what do we do about it? And we've got two people joining us today who can really talk us through these topics. That's right, Carolyn. And our guest today, Barney Schauble, is his senior advisor at Nafila, where he worked for decades in the growing catastrophe bond market and headed Nafila Labs, where his primary responsibility included oversight of research and insure tech. So Barney comes to this topic and our conversation today really from inside the industry. And we're also joined by our second guest, Spencer Glendon, who worked first at Wellington Management and is now. The founder of a nonprofit called Probable Futures. So Spencer represents kind of an outside view, finding his way into climate and insurance. And what our two guests share is a detailed kind of structural piece of how capital markets are actually put together, seen through the lens of climate change. And that's exactly what we'll be talking about on today's podcast. So welcome, Spencer and Barney. Glad to be here. Happy to be here. Thank you. Yeah, thanks for joining us. I want to disclose from the start that I feel honored that both Ba Barney and Spencer serve on advisory groups for insurance for good and have had the great honor of collaborating with them on a paper on this topic about the future of insurability, which we're gonna really dig into today on the podcast. So as Nuantar said, we know you've both been thinking really deeply about this topic, but beyond your bios and kind of what we read about your background, we wanted to hear from each of you just to get us going. about what brought you into this topic and the experience that you've had that informs your thinking on it. So Spencer, let's start with you. We know you went from almost two decades at a large financial firm, Wellington Management, to founding a nonprofit focused on climate risk communications. So fill in the story on how asset management led you to wanting to improve people's climate literacy. Sure. You could just reframe it as why did you quit your job? That would be one way to ask the question. And The answer is pretty simple, which is that in my role in asset management, I was overseeing and helping lead research at a big investment firm. And even before that, I had thought about a variety of topics. And so both at the big firm in my research agenda there and before, I had thought about lots of things in the world, lots of issues that ⁓ mattered to me and mattered to other people. Including in particular sort of how prosperity and catastrophe happen in society. And I had thought of that as a sort of portfolio of ideas, a set of things that mattered. And then I discovered that climate change underpinned all of them. I decided to look a little bit into the history of climate research and discovered that these models in climate science were better than any model in finance. They had been predictive for forty years, they were predictive for the right reasons, they were predictive at the right scale, so they worked. At a local level and at a global level. And that just isn't true about really any model in finance or in economics. It's like I've been ignoring the most predictive models and explanatory models and important models in human history throughout this time. And I know that nobody at my work knows anything about these. And so on the one hand, I discovered that these models were predictive, that they were useful, and so that seemed like something everybody should know. But on the other hand, I understood why finance would be very slow to embrace them, why it would be very hard to get, particularly tradable finance, to do anything about them. And the reasons were twofold again. One is the climate had been stable for about twelve thousand years. Because it didn't change, nobody worked on it. Finance doesn't you know a ⁓ assign anyone on to some sector of the economy or markets that has zero change in it. And so nobody was used to looking at this data. But in particular, also, even if they did, the past had no evidence that the climate mattered, that stable climate had never been important. And so I realized that prospective climate change was going to be very hard for financial modelers to even model because there wasn't a precedent. In Carolyn's economists and economics terms, there was no elasticity. Nobody knew if climate changes by X, these other prices change by Y. There was no past evidence to go on. And lastly, in tradable finance. There really isn't a where. There really isn't a place in particular for most things. People are working in financial offices that are basically like spaceships, and they're looking at screens that are just numbers. And what I realized is that actually finance had become not very attached to place. There really wasn't place in finance. And so the idea that this mattered a lot, in fact, it probably mattered to everything, but finance would have a hard time incorporating it. They would have a hard time estimating it. And that the way it mattered was spatial and space, place weren't really part of a lot of how finance worked, told me that I gotta get out of here. This is not the

place to work on these ideas. And instead, let me find ways to collaborate with scientists and other people without knowing exactly where that would be and how that would happen. So I helped found a nonprofit and then was lucky that people like Carolyn and Barney found us to collaborate. So that's a longish story, but hopefully it also sets the table for what we're going to talk about today. Yeah, definitely. And it it also touches on a couple themes from our last podcast also. Just the two things around kind of the importance of understanding kind of what the future looks like is gonna be very different than what the past looks like. But actually and you know there's been so much dialogue around uncertainty and what does that mean in climate kind of modeling terms. But Spencer, your point of Actually, these are very reliable models. The underlying science and predictability of them is something that we should really be looking to. So that was a key theme. The other is just the importance of place. ⁓ and can't echo that enough as we're trying to think about how to build resilience and adapt and deal with the changing climate. ⁓ you can't decouple that from place. So two themes that keep emerging here on our podcast. but Barney. I would love to hand it over to you. And you jumped right into the kind of nascent early days of the Kat Bond market, helping really build it up ⁓ as a global market. And you have kind of an insider view of risk transfer sector that's really let you see firsthand how climate is influencing it and also how it can be used as a way to help us better manage climate risks. ⁓ So we'd love to to turn it over to you to have you fill in some of the details on what brought you to these topics. Sure. ⁓ thank you. So I, you know, as you mentioned, it's really about place and time. I happened in 1993 to be in the right place at the right time, which was as a student in college working at Marsh, you know, one of the largest insurance brokerages. I had no idea what they did when I showed up there. I just wanted the job during my senior year of college. And Their basic business for large companies was arranging complicated risk transfer transactions. If you're building a bridge and you get sued for bad design, or if you have some sort of complicated property or liability coverage. And so I was learning for the first time about that marketplace, how people thought about risk, how they priced it. But at the same time, there was a discussion happening. This was also the first time I was reading the newspaper every day, and in the Wall Street Journal and the New York Times, they're talking about Bankers Trust and Chase Manhattan and other names that aren't with us anymore, designing risk management products in financial markets. And to me, as as a neophyte in financial markets, I was curious as to why there's this very strange but very bright line between these are risks in the insurance and reinsurance market and what that means, and these are risks in the financial markets and what that means. But the legal structure and the people and the way that ⁓ pricing and trading worked were entirely different. And as it happens in 1992, a big hurricane had hit not Miami, but near Miami, and done a lot more damage of insured loss than anybody had anticipated. And that had really alarmed people both in the insurance industry and in the financial market, saying, maybe we've miscalibrated the amount of exposure that we have in the insurance and reinsurance market. At the same time, you know, as Spencer noted, you were just starting to see the adoption of desktop computers at Marsh and at other companies in the industry. But along with those desktop Computers, software programs that could help you think a little bit more systematically about probability of events, severity of events. And so really it was a confluence of losses, new tools, an awareness that there wasn't enough capital, perhaps in the existing insurance and reinsurance industry for large events and financial market innovation. A lot of people were thinking about could you take risk from one market and sort of transfer it into the other market? But nobody had done that. And so I happened to be there at the right place and the right time and went back to school and wrote my undergraduate thesis on this idea that turned into, you know, a larger marketplace, firstly for catastrophe risk and then later on for weather risk, you know, not property damage, but rainfall or heat or wind passing through a wind farm. And if you spend time in that marketplace thinking about probability distributions in the 1990s, in the naughty, you start realizing that those probability distributions are starting to change. And our investors who looked at that asset class were institutional investors who obviously own lots of things across lots of different asset classes. And part of my conversation with them started to turn into, I know you're understandably focused on how climate change is impacting your insurance link securities or weather derivative portfolio, but this is one half of one percent of what you do. How are you thinking about that impact on everything else? And there wasn't a great answer for that at the time. There still isn't a great answer. And that led to Some other work that I tried to do and then meeting Spencer and Carolyn and trying to think a little bit more about how should our current financial systems address this question. I think these stories on your background are helpful t for our listeners to understand why you both bring such unique insights to this intersection of climate and insurance. But before we get actually into insurance and where we are today and where we would be heading, I want to pick up on something that you both alluded to in your introductions, which is the impact of changing loss distributions. So, Spencer, talk to us. I know you've thought about this before. I've heard you speak on it so eloquently. Talk to

us about human civilization and climate stability. I know that's a grand topic, but as I've heard you explain, all of human civilization really emerged in a remarkably stable climate, right? So talk to us about what that really means. Yeah. So let's define civilization for our purposes, which is ideal for thinking about California. So civilization, I think at the most basic level. can be understood as settlement. Settling in place. And implicit in it is the idea of planning, which is this idea that we're gonna build a house, plant a crop, install some kind of infrastructure, commit to a place. That's what civilization is. So it's not that civilized people are un are better than uncivilized people. It's that civilization is different from being an itinerant mover. It's different from being nomadic. It is settled. And making plans. And this may seem like a very academic distinction, but it happens to be pretty important because there's no evidence that human beings settled until about 9500 BCE. So human beings were around for a super long time, a couple hundred thousand years at least, and they didn't settle. They kept moving. And this was a puzzle. Why was this true? And then that puzzle was answered by climate science, which was until 9500 BCE, the climate was constantly changing and not very nice. And starting about 9500 BCE, it got to be stable and mild, perfect for us. In fact, nowhere on Earth was too hot for the human body, and much of the planet was temperate. So just like ideal California weather, warm during the day, cool in the evening. And we got used to that. So used to it that people started making plans. My favorite ⁓ version of this is an orchard, which is one of the things that California is full of. In many ways, and all of which are troubled because you could look around and say the weather is like this here, and this weather is suitable for olives or for peaches, and say, I'm gonna plant peach trees or olive trees, and they're gonna grow for decades. So we think about that, it's quite remarkable. It's an expression of confidence that the weather will stay exactly the same. And we just got used to that. And that's what allowed us to stop thinking very much about climate and assuming it. And those assumptions We start building more and more on top of them. We build not only crops and orchards, but roads and sewer systems and power systems, all of which can assume that the past climate is a map of the future. So if you look around any piece of California infrastructure, from the power lines to the power plants to the asphalt to the sewers, they all were built assuming that that local climate wouldn't change. And that just made complex society a lot easier. And so my worry is that. As the climate changes, we have to rethink so many things in a society that A is already very complex, so the implications are all over the place, and B isn't very good at paying attention to the climate because for twelve thousand years they didn't have

to. And so thinking about change in an already complex society is a new challenge. Does that help? Yes, thanks, Spencer. That's really helpful. And I've found that This is something really difficult to get your head around. I mean, like that assumption of stable climate is so ingrained. And I think that there's often this default to thinking, ⁓ there's some new risk level. And now it's stable at this new risk level. But really, we're in this constant period of change as you talked about, that the risk is just going up year on year. I heard John Podesta talk about this once, and he reframed it in a way that was really helpful for me at the time, which was: we constantly hear this hottest year on record, right? Biggest. Wildfire, most acres burn, whatever, like all this record breaking. But if you flip that around and you're like, that was one of the coldest years you're gonna experience and your kids and grandkids are gonna experience that kinda wakes you up to it. I don't know if any of you have tricks for helping wrap your mind around what this means now. Yeah. Yeah. I think two things. One is you used the word risk that I think is gonna be central to this conversation. A changing climate in and of itself isn't a risk. It's just a thing that happens. The risk is that you have made assumptions about the future that are going to be wrong, or that things are going to happen that are outside the range of what you are prepared for. So it's about having expectations, having plans, and having sort of ranges. So risk comes not just from change. It comes from being unprepared for change. And that's the thing that I think is ⁓ really hard for people is that there's this idea of like, every change is a new change, but then then it's going to be flat from then on. Right. And so if you look, I'll use an example. I've been involved in some reviews of different cities and co and states' heat plans. And almost all of them show a map of a a graph of, you know, rising heat in the place. And they all stop at last year. Now there's a trend, but there's no extrapolation or informed view. It's this idea of like, well, this has happened. And one way To get your head around this, I think, Carolyn, is to use the past tense, not say California is like this or you know, one part of California, big sir, is like this. Say was, use was, and use is now, and use will be right when you're making a plan. We use this verb tense called the habitual present tense. Only some languages have it, English has it, where you say LA mild and it's not too dry and not too hot. That is in that implies it was, it is now and always will be. It's a very different thing, but accurate to say Los Angeles was warm but not too hot, dry but not too dry, is pretty vulnerable and will be hotter, more prone to things. But just using the verb tense I think can be super helpful for your everybody, whether they're people making decisions in their own lives, People interpreting data, academics are really bad

at this. They take backwards data, they find insight in them, and then they use the present tense to describe them. But also for policymakers to think in time frames that are past, present, and future. Yeah. I've seen that so much over the years in the policymaking space. And I think where that's shown up for me is, you know, the our tendency because of Spencer, what you described in terms of kind of the the stable past that we've come to build our systems and societies around, we're used to, from a policymaker standpoint, being able to anchor to a single number. And I think this, like your verb tense change and suggestion is really helpful. I think also it's an interesting way to think about how to help policymakers get comfortable with a range of what the future will look like. And we need to be making decisions in a range of Potential futures and what that looks like is so interesting. And yeah, is something that we are not instinctively as decision makers and policy makers when we're trained around a single number. but Barney, I would love to get your thoughts and kind of what and your view too on this thing, this theme we've been also talking about around risk. It's like there's ways to think about managing risk that maybe isn't anchored to one single number. or one single view on things, but actually thinking about it more broadly. So before we dive in more, would love to get your kind of perspective and context on the history of insurance and where insurance even came from and this idea of risk pooling. Sure. So I I do think it's helpful in the same way that Spencer described looking at climate over human history. It's easy to look at the insurance industry in the modern day and say, ⁓ this is a a specific service or good that I want to buy. And we can talk more about that later. But it's helpful to rewind and say, you know, where did this idea come from? And one analogy that Spencer and I have used in some of the other talks we've given is this really begins with ship owners, right? You know, you send five ships out from London, four of them come back from around the world. You never know whose ship is the one that goes missing. And so what happened in the very early days is those ship owners sat down and said, Rather than one of us being unlucky, perhaps we should just think about compensating the unlucky one from the lucky ones, because we have some rough sense as to it's not all five, but you know, it's not zero. And that's really where you think about this concept as you described of pooling or of risk sharing. And in fact, an old expression used for this ⁓ at the beginning of the market that became Lloyd's of London, obviously a famous market that started as shipping insurance three hundred and fifty years ago. was it's better that the loss impacts the shoulders of the many than the heads of the few. Right. So the whole idea is let's let's share that burden. And that's ultimately how the insurance industry develops. It isn't transfer

of risk, it's sharing of risk. You see bigger cities get built, you have more activity, you have fires, a fire can burn down part of a city, you start to develop a concept that all of the people who live in the city, if they contribute some amount every year, that amount should be enough to compensate where there's a fire, that also leads to requirements. You know, if you have a reckless ship captain who's drunk all the time and heads overseas, you're like, well, maybe he's a riskier than, you know, the responsible ship captain. So we're going to set some expectations on how they should behave. This goes back to, you know, if you have a glass house or a wood house or a brick house, right? Going back to, you know, stories that all children know, there are different levels of riskiness. So perhaps To participate in the risk sharing, there are certain minimum expectations of how you are going to construct your building. Now ultimately, that develops into an industry, and that industry systematizes that pooling. And the statistics become relatively well understood. And because the climate is stable and the shipping environment is stable and the automobile driving environment is relatively stable, you develop enough confidence in the underlying statistics that that effectively can all be assumed to be consistent. And this just becomes A service that somebody purchases. It becomes a cost line item that's pretty predictable. You buy it a year at a time. The assumption is there will be plentiful supply. And so that's what the industry has come to, and that creates problems, which you know we can certainly discuss. But the original idea is simply how it's better, you have more confidence in the outcomes over a larger pool of individual probability distributions than you do for any one person or any one building. And ultimately all of this comes down to. Quantifying some sort of probability distribution, how likely are bad things to happen? How bad will they be when they happen? And once those distributions start moving around, it becomes more complicated. Barney, before we jump into the kind of end of what you just said, where we are today, some of the current challenges, I wanna pick up on one thing you stressed there, which was that when the insurance markets, the risk pooling, the risk transfer are working well. It does actually lead to a type of engagement and risk management that can help make worlds safer, assets safer, people safer. You talked about the regulations on the ship ship captain or the type of building. And I just wanted to put an asterisk and maybe get both of your thoughts on this that when risks are insured, yes, there might be problems with insurance right now. We're gonna talk about that and where it's going, but it does force this risk management. So I get really concerned in thinking about climate risks about all the risks that aren't insured. And so Nobody's thinking about them, even thinking about them poorly. And because we have a little bit of a crisis around insurance and wildfire or hurricanes or whatever, it is forcing that conversation about climate adaptation and risk management. What do we do about the risk? No one's pricing at all or even talking about. That's a whole different conversation. But maybe if you had one or two sentences on how you think insurance has, you know, is it fair to say that in the past it has effectively played that role of kind of shaping management as well? Right. So ⁓ and this is a ⁓ piece that Spencer and I are are working on right now, but this is the difference between sort of the early days of a market where you were designing how should it work. You have people started to develop electric appliances, sometimes they didn't work very well, and they started a fire. You create Underwriters Laboratory, which says electric appliances should meet certain standards before you're allowed to sell them. When you have the advent of electricity and appliances in the home, people are trying to figure out this problem together, they're more creative and more thoughtful about how do we solve this. As with any market. The longer it goes in a standardized factory-like large scale environment, the more it just becomes a standard product that you buy. You know, and so it's harder then to go back into a large-scale, standardized marketplace and start to tinker with it or add new features to it. And you know, even just going back to, you know, Nuantara's observation about sort of the trajectory of the sector that I worked in, it took a long time to convince people, even though it was an understood risk and a quantifiable risk. And financial wiring that already existed, that this is a new product and this is worthwhile for the buyers to use and this is worthwhile for the sellers to use. You know, anytime you're trying to change an existing system, whether that's to introduce sort of a new sector or that's to change an existing sector, that's hard. It's doable. The insurance industry has responded in the eighties to realizing that liability was potentially a much bigger legal issue than it had been previously in the 1990s to catastrophe risk, in the naughtyties to Terrorism and cyber, you know, there have been risks which have emerged that have been successfully navigated in terms of creating some expectation and requirements and standards. But that's hard. And as you say, if you go into an existing industry and say, ⁓ now you need to incorporate new features, there's a lot of entrenched people in the system you have to convince to start to think differently. Yeah. And maybe a follow on question there too is I I think one of the things that Carolyn and I have talked a lot about in our work together, and then has also come up on the podcast, too, is one of the additional challenges as we're thinking about climate and the changing climate is that it also requires this kind of more collective action and alignment across different systems. And so it also,

you're not only asking, say, insurance to take on additional risks, like you were just talking about, Barney, but you're also trying to deal with how to take on risks that are owned and managed in a very diffuse way across a ton of different actors that need to be aligned towards the actions of reducing risk. And that just feels like it's another layer of complexity that we've got to work through in this space. ⁓ but would be curious, yeah, your thoughts on if you see that as another layer or is that separate a separate issue? It it's becoming a more and more critical layer. The assumption a lot of the assumption that underlines sort of basic financial markets now is you have just all of these individual rational agents, companies and people and and that that's the level at which you need to price the risk. Is this city going to pay you back for its municipal bond? Is this person going to drive in a responsible manner? But when you disrupt the underlying foundation, all assumptions around climate as Spencer described, that has implications beyond just the individual level your house, your farm, your building, your company, your town, you know what the state of California decides to do what the country of the Philippines decides to do. There are system questions and the and getting systems to move is obviously harder than a simpler model where in your head you're just looking at drivers and saying, you know, how many of them are going to get an accident every year. You know, you're you're fundamentally changing the context in which people are making these decisions. Yeah. Barney and I start by talking about boats a lot, in part because the Boat is really clear who owns the boat. The boat is very distinctive and finite. And in fact, the five boats that go out are going different places to do different things. Boats aren't really like houses, and they're even less like neighborhoods, and they're even less like municipalities. And so the risk to the boat was discreet, the ownership was clear, and it was likely uncorrelated. What happens when the risks Are different than that, well, you wind up with problems of markets. One of the things I find interesting, I I spend a lot of my career and my adult life in places where markets don't work very well. So I lived and worked in Russia, I spent a lot of time in China, I spent a lot of time in parts of America where markets didn't really work very well. And in those places People don't expect markets to do the things that Americans expect markets to do. So this same conversation actually makes a lot less sense in China, for example. Because thinking at the building level or the development level or the market level or the municipality or the region or the country level actually makes more sense than thinking at the property owner level. And this idea that we are all discrete agents in economic parlance who have our own domains and our customers individually. What that does is it puts the burden of pooling on

the insurance company. So the insurance company does all the pooling sort of invisibly to the customer. Instead of the people being aware of the pooling themselves, who's in the pool? With whom am I doing this? One of the things I like to say to people is that climate change will make you ask this question of who is my brother and am I his keeper? Which is like, who am I responsible for? And am I, do I know who that is? And on the other hand, do I know who's looking out for me or not? And we've trusted these systems through markets to do this. And that's what state farm and farmers and Allstate and Flow and you know all the different characters you see on the K TV commercials are claiming is we will take care of the pooling for you. You don't have to take care of the pooling or even know about the pooling. It's kind of magic how Jake from State Farm will just make a pool happen for you. And that's the part that strikes me as particularly, on the one hand, troublesome if you try to solve it, to Carolyn's question, with the insurance industry solving this problem, where a company creates the pool, as opposed to other forms. Of shared awareness, pooling of risk, moderating and monitoring of behavior. I'm very interested in the difference between Altadena and the Palisades. So Altadena is unincorporated, and the Palisades in a neighborhood within Los Angeles. Those are very different ways of organizing. And so this set of questions about what we're going to do with climate in response to climate change is going to make us ask. even more fundamental questions about how are we actually bound together already? And are those the right systems? Just one thing I would add to that, because it's come up a lot in conversations I've had individually with people who are curious about the insurance industry, is Spencer's observation is is also important because many people think of are not aware of this pooling dynamic horizontally across their cohort. They think of insurance as almost like a 401k. Like I paid my auto insurance company or my homeowner's company for twenty years and I haven't had a claim and therefore like that money should be there with my name on it that's earmarked for me for the future. As if, you know, everybody has their own individual silo where they're pooling their own risk over time. Cause it's an extension of that same agent ownership consumer mindset. That's obviously not what's happening, but it's a surprisingly popular misconception, which is not, ⁓ I paid in last year and this supported other people who were unfortunate. Instead it's like I have my own you know, accounts and that account should be there waiting for me, which is obviously not correct. Yeah, that's all yeah, this is so interesting. And I think, you know, just seeing when working in California and seeing this kind of the political ramifications of both the kind of misunderstanding or different understanding, Barney, as you were describing. And then Spencer, also your

point of kind of we've put this on an industry to hold the collective pooling and risk. And also I think there's this an assumption that insurance also will somehow manage the risk management and risk reduction. And and I really appreciate this because I think we do need to pivot more to what is our collective approach to these issues and how do we leverage we can talk through kind of if this is the right language that you all would use, but like leverage different tools in this system to help us manage that. But it's not necessarily One industry or one sector that's going to be able to do it all. So this is so so interesting. But Carolyn, I cut you off, please. We're to pick up on what Nuantar was saying, we're seeing in California and actually in many places, I think around the country, the growing use of the word insurable, insurability. And I think part of it is speaking to this bigger issue of a system, of a community, and to try to get us out of that mindset. Barney, I really liked what you were saying about how our conception of insurance is that we've Been saving or something instead of understanding the collective risk pool. So we keep hearing about insurability, and because people are really concerned that it might stop existing, we might not be able to continue to have the insurance market that's been operating so helpfully in the background for so much of our economic activity. So let's dig in on what we think is meant by this term. And are we really starting to hit limits of insurability? And why might we think we are? ⁓ I'll start as the outsider to this. I I didn't ever expect that I'd be interested in insurance. I was a typical American who thought, fine, the insurance bill should be roughly proportional to, I don't know, the cable bill. That's roughly like what it should be. And there are these companies and I kinda don't trust the ones that market too heavily. So, you know, should come on some letterhead and I'll just pay that. Got like an old company, you know, Northwest Mutual. That sounds like somebody who's just gonna be there for me. One of them was like Mutual of Omaha will be there when the going gets tough or something like that. It was advertised on Little House on the Prairie. They were the sponsors of Little House on the Prairie. It was just like wholesome there for me, and I was like, fine, I got no interest in that. But I got pretty interested in how perversely high-paying. Finance became while I worked there. I was the beneficiary of this. Money just started sort of washing over investors for reasons they themselves didn't understand. And so I went back and looked at the history of compensation across all of finance. And in the 70s, people who worked in investment management and people who worked in insurance got paid the same. And then insurance just stayed at a the same pay. And the pay for people who were in the equity market or bond market just went up and up and up and up and up. And so you have this industry

that kind of got boring. It could be done by machines, it didn't really change, nobody paid much attention to it. And the more I thought about that, I said, ⁓ that's terrifying. The part of life that is most risky, nobody wants to work in, nobody cares very much about, and we have super unsophisticated notions of it. Like somehow it's tied to Laura Ingalls Wilder. That is not a s good way to think about the risk of my house burning down or being flooded or something. And so I came into finance to working on insurance because it is so strange. It's super weird. And it's very, very specific to the climate we had. So what is insurance as it currently stands? It's always a contract for one year for a single property for a very well specified set of risks, not just for, ⁓ I have insurance, so my house is fine. Like discovering that If your house burns down because of a grease fire, that's different than if your house burns down because of a wildfire. Those fires aren't the same. Well, that was super interesting. And then the idea that there are all kinds of floods that are different, but you know, the main feature of my home flood insurance was home insurance was you do not have flood insurance. There's one page dedicated to just telling me that I did not have flood insurance. Like, what is this insurance actually for? And it's for a very small set of things that meet the criteria of easy pooling. And they're only for a year. And they're only for specific kinds of assets, even. And so you have this thing that takes care of all of this risk that we put over here that's actually very, very limited and very narrow. And so when I started asking this question, well, is the future uninsurable, there are two parts to that. One is how big are the new risks that come along? But two, is are those risks anything like what the old insurance industry was built to take care of or built to address? Do we have the right relationship to insurance that we should in order for these new risks? And then the answer was, well, clearly no. Like even just the simple fact that insurance is only one year at a time is an implicit statement that the climate is stable, which is The cost of this year is gonna be about the same as next year. There's no reason to get a 20-year insurance because there's not some trend. It's just stable. And so we didn't pay attention. But if you think about the risk of an asset, your house, road, building, it's not one year at a time. You don't borrow for one year at a time. You don't invest for one year at a time. You don't plan in a civilization sense one year at a time, but the risk contract is only one year at a time. So I think before we even ask is the future insurable, you should know how peculiar and specific insurance contracts still are, but developed, before you start saying, Well, what are we going to do in the new world? I think that's a really important point to emphasize because I feel like economists for a long time thought, ⁓ there's

this industry insurance that prices risk, that's gonna send important information and financial signals to market. That's gonna efficiently deal with climate adaptation. But if you're only pricing one year, you're not sending any signal at all in any way about future risk, are you? We're mostly here talking about property insurance. And the history of property insurance really is the history of making sure the only real risk in property insurance is you burning your own house down. So Barney's point about the underwriters laboratory and the role that insurance companies played in forcing municipalities to have fire departments. And fire codes. Society actually took a lot of the risks off of the insurance companies by developing ways of limiting fire risk, by making fire risk less correlated. So I live only 200 yards from a fire station, and then there's another one not that far away. All of those were built to make insurance affordable, essentially, so that if my house catches on fire, the neighbors don't really have to worry that much because the fire department will come. And so if you think about this infrastructure. Society built, it constrained the risks into what the insurance industry could do well. So we reshaped society to make insurance work more than insurance expanded to take on new risks. managing that underlying risk effectively. Yeah, exactly. And that's I was just thinking about that. ⁓ because Spencer, what you were describing around, and Barney too, around kind of how we dealt with electrification and managing that risk is fundamentally different than how we deal with, you know, urban conflagration and climate-driven wildfire risk that is not from the inside out, the structure, the engineering of the house, it is the outside in And how we engineer and design communities to reduce that risk. And that is fundamentally a collective problem. It is not an individual. I mean, well, and this is the this is the place that we keep getting kind of we haven't quite, I think, figured out how to talk about it in a way because there also is an individual action piece. And we've been caught in this wildfire conversation in California of well, if you harden your home, you trim. your trees, you know, you box your eaves, you figure out how you don't have any, you know, wood fences touching your building, you fireproof your, you know, or ri make it more resilient to fire. If you do that but your neighbor doesn't, it doesn't matter. And so there's both a like collective and individual problem. And I I do think we keep trying to put it on the insurance industry as the the way and how we solve that problem. anyway, yeah, my head is My head is going on on all of this is so insightful. I think there's another question to explore though around insurability, right? And the first piece that Spencer and I worked on together talked about this, which is insurance became enough of a commodity for all the reasons that we've described. It was a relatively well

understood, stable risk that it became seen as just an outside cost that you could regulate. The assumption was supply is plentiful, there will always be competition. It'll always be available. But wildfire is a good example. You know, New Entara mentions fires here in California in 2026 and 2030 and 2040 are an entirely different phenomenon than they were in 2010 or in 1990. A combination of heat and evaporation and drought and building and you know lack of of tending to forests, what have you, has led to just a fundamentally different probability of these events occurring. But also a fundamentally different severity when these events do occur. And so that changes the equation around what the cost of that is. And you can think of the cost of that as, ⁓ I have to pay more for insurance. You could also think of it if you just did away with insurance entirely in California and said, we all are just going to pool our risk, the expected cost of that every year is just much higher than it used to be. And so when we talk about insurability, there's often insurability and then there's this invisible set of Parentheticals that come after it, which is I want coverage, but I also want coverage at a price that's less than my mortgage and isn't much less than what I paid last year and is affordable. And that's not really a market. And so the question that Spencer and I asked in the original piece that we wrote in Fortune was: we have to decide societally, is insurance a good, which is it can be insurable, but the price or the terms of that insurance may be very different than what you had been accustomed to. And if this were a market for apples or batteries, you know, that market would move reflecting the change in those underlying costs. Or is it a right? And I think many people effectively think of it as a right, which is I have always had a relatively modest line item in my expenses every year, which transfers risk to other people. And right now we act as if it's a good, but every single state has a lot to say about what you can charge and when you can charge and how long the contract can be and really constrains that market offering. And so therefore it starts to look more and more like a right. It starts to look more and more and you know, we've all talked about this in other forums, but every single dangerous state in the United States, which is more and more of them, now has a government-backed, you know, insurance company and or reinsurance company that is taking that risk at a lower price than the real price. And you know, that's the road that we're going down is you're effectively just creating a system which doesn't really show a price. And that has two problems. Obviously, one is somebody's going to pay for that later on. And the second is that you really remove the signal on a one year basis, let alone on a multi-year basis, if you're making decisions as a city, if you're making decisions about a business where you should build, if you're making

decisions about a homeowner, should I take the mitigation work on that New and Tara described, will I then get some benefit if you removed the price signal, which we effectively have. All of those decisions are either being made in the dark or not being appropriately reflected because they live in in the in the tense that Spencer describes. It's just assuming the world is like it used to be and isn't thinking about what the world is it should be. And so when people talk about insurability, it's not just about is there access to protection? Because that's a simpler question. And I think lots of things could be insurable in that way. It's really it comes with all of these other unspoken assumptions that it's time for us to revisit. I think that's really helpful, Barney. And I think these systems that we create, these sort of publicly created systems of insurance, really hide who's ultimately paying. They and so people assume I have coverage and that's what they need, which is great, but ultimately that's coming back to people, right? Because if we're not investing in lowering the risk, someone's paying the cost of risk at some point. And there's ways that we can manipulate how that risk sharing is done that can make that very not transparent to people. And I think While it's really important that everyone have access to the resources they need for recovery, we also don't want to go too far in hiding what those risks are and the incentives, exactly as you were saying. And I'm thinking of some examples now where in my mind that's been particularly egregious, and I'm curious your thoughts on these, because they get into some of the technicalities of insurance that I think often get lost. So I'm thinking of Texas, for example, and the Texas wind pool had which is maybe, you know, not unlike the California Fair Plan, but for wind risk from hurricanes. Was set to be able to cover claims from a one in a hundred year storm, a one percent annual chance storm. And people felt that was too expensive to have that kind of claims paying capacity. So quietly the legislature just said, we'll only be able to pay claims from a one in fifty. And magically insurance prices came down. But really, that just means that when the bigger storm comes, which we know it will, someone else is gonna pay, right? So how do you think about these systems of insurance and risk transfer in ways that Balance all these different things and in a way that people still get the information they need about risk. Well, I think the information that you need about risk is the key starting point. So all of these systems, this is a little bit like you know, the metaphor that Spencer used, if civilization is built upon this stable climate, all of these decisions can only be made intelligently if you have a baseline understanding of risk. Now the good news is through probable futures, through lots of other public open source and private services. There's never been more plentiful information about

the current level of risk and the future trajectory of risk. But for most normal human beings, they don't necessarily know where to find that. And their stein meet in two ways, which is the federal information about that is deliberately outdated, as we saw when Superstorm Sandy hit New York and there was a brief congressional attempt to update public information to reflect the flood risk of today, let alone the flood risk of the future, because right now it only shows the flood risk of our past. And that was effectively quashed because that is going to lead to more expensive coverage. So you have people making decisions based on outdated public information, which is obviously bad, or a situation, and Spencer addressed this in his most recent letter that he sent forth from Pobble Futures that he does every quarter, a p ⁓ software company, First Street, making available information through a real estate listing site, Zillow, so that homeowners could make more educated decisions. And again, that being withdrawn because there was some concern that. With better information, homeowners might not buy houses in certain places. And so without a baseline of publicly available, relatively accurate current information and future information, everything else winds up being built poorly. If you had that baseline, and there are many public and private sources of this and companies who could provide this, then you can start to look at given this risk information and given the trajectory of the risk, what should coverage cost? What am I covering? How should that work? How is this changing? But That has to be the bedrock on which all of this other financial architecture sits. And right now, for lots of bad reasons, that's either not available or obfuscated because of concern about the short-term consequences associated with better information. But as we all know, the long-term consequences of not having good information are much more troublesome. Yeah. So to this end, going back to your first question, when I got together with some people to found probable futures, we thought of it as a data product. We would provide Publicly available data. So you can go to probable futures.org and look at maps of all the little places in California and see what the past range of temperatures was, what the past probability of drought was, what the past number of wildfire days, risk days was, and see how that has changed and is likely to change. So we thought we'll provide people with this data, and that will help better decision making happen. And that's true. But we don't refer to ourselves as a climate data organization anymore. We refer to ourselves as a climate literacy organization because it turns out you need some key concepts to understand this. But if you have the key concepts, then the data makes a lot of sense. And so I thought it was a good time to share a couple of those key concepts. And the first one is that what is happening is greenhouse gases are trapping some amount of energy, more and more each day, actually. That additional energy is what we're measuring in temperature. So all a higher temperature is, is a more energetic atmosphere. And so if you look around and say, well, what's going on outside my window is there's just more energy out there. There's more potential for stuff to happen. Those molecules are bouncing around and they are smashing into things with more force than before. And any system that has more energy can do more things. So you have this system that is just more energetic. And a little bit of basic physics tells you that a system that has more energy is harder to predict. It can be in more states. And so the climate wasn't just stable, it was mild. And so there weren't giant hurricanes, and there weren't giant forest fires, and there weren't really giant problems in the way there are increasingly, and even our sense of what constitutes giant will change, because there just wasn't enough energy to generate those things. But as the oceans get warmer, what that means is they are more energetic and the atmosphere is more energetic. And so the system around us has more energy and can do more things. That is a fundamental piece of literacy that I think everybody should have. Temperature isn't just some measure, it is a measure of energy. And if you just look around and say, wow, everything outside's got more potential to do stuff, that should be worrying. And now we get to the second piece, which is particularly acute for California. So I have ⁓ my wife's family lives in California, and for many years my wife and I owned a home in Venice. And if you think about how specifically people describe even just slivers of California as being dis you know, this is so Barney lives in Marin County, and even Marin County has got little pieces of Marin that are different than other parts of Marin. And so My brother-in-law and his family live in San Marino on the east side of LA. And we were in Venice. Those are like wildly different climates. And you know, you move in just a bit from Main Street on in Santa Monica and it gets different. And then you move a little further and it gets different. And you move a little further and it gets different. ⁓ Pasadena versus you know for San Gabriel, now it's different. That specificity, in particular in California, California is made up of all these microclimates. And those microclimates fragile. And so if you move just a little bit, it means that the customs you built, the ways you thought about living, the plants you planted, the infrastructure, and all the living things around you that were suited to that microclimate are probably now out of range. And so a way to think about the forest fires in California is the trees are kind of in the wrong place. It's just not the right climate for them anymore. And that framework of it's more energetic and each place had a specific set of ranges that was so stable that we built everything around that means that moving

even a little bit out of those ranges can be disruptive. And so those two pieces can allow you to then take in data and say, okay, well how fragile is it where I live? And if you think about a lot of California, a little bit less rain makes something a desert. Yep. A little bit more heat makes it dry up. a little bit less of this or that, or in the case of the fires in Pasadena and in in the Palisades in Altadena, the winds coming before the rains by just a few weeks is a big difference. And so that idea that some places have very sensitive climates and the system has more energy are helpful ways of framing this that I think are can be useful to anybody. And in that context then data will make a lot more sense. Yeah. That's so important. And I think it touches on two things. One, we've talked about here already, and it's just this re-emerging theme of the importance of understanding place in that context. Spencer, as you were describing, you also talked about ⁓ fragility, and that was something that actually came up on the last podcast too, and kind of understanding that as a layer to this and understanding what even those small changes mean in terms of kind of fragility within a system or within an ecosystem. ⁓ so those are so important. So this has been a great conversation. Thank you to both of you. We know we're getting near the end of our time, and we wanted to end by taking this back down to something really specific and maybe more concrete and think about policy and policy recommendations in the state. So maybe for each of you, if you wanted to provide some advice to California policymakers. Either about specific proposals or maybe not specifically what's on the table, but what are the underlying axes that policymakers need to be thinking about when they're making decisions about different types of interventions, many of which are very live at the moment in the state? Barney, you want to start us off? Sure. So the good news is that this is a problem many states, countries, ⁓ governments are grappling with right now. There are a lot of models that exist around the world. As people try to grapple with exactly the same problem. And you could start with just three axes along which each government, including the state of California, is going to have to consider what are the principles that you really believe in as you come to a solution. And not to say that one is automatically better than the other, but if you think about certain spectrum of possibilities, one, as we touched on, is just transparency versus opaqueness. You could argue the best starting point is. have information available to anybody who is thinking about, in this case, property, commercial property or or homes, here is better information. There's a gigantic amount of science that's available, but starting to provide some public record of here is what the past and the current state and the future of the weather and the exposure and the kinds of events that could impact your home

look like and what that translates to. So That's one end of the spectrum is to say, let's start with a public understanding. And the other end is to say everybody's going to come up with their own interpretation. People can think the future is going to be different or not. Let's just make that an entirely private conversation. So one is just about information and transparency. The second, which is very related, is is this a public problem or a private problem? So again, you could say individuals and towns and and cities and states, this should just be solved by the market. In which case you should really allow there to be a market for one year coverage and 10 year coverage for low cost insurance, for high cost insurance, and let prices float and let people offer different kinds of products and see what happens. But really, you're just saying this is not something that the state government wants to get involved in when you think about the California Earthquake Authority or the Fair Plan or the Texas Wind Pool to say we want none of that. We're just going to let this be a private market solution. The other end of that spectrum, obviously, is to take the opposite approach, which is to say everybody in California is just gonna pay in every year for the amount of money that is necessary to pay for the bad stuff that happens in California. Like we're going to create a public version of this ⁓ solution and that's we're gonna make that mandatory. And there are countries that have done this for flood or for earthquake, and who have said the resilience of the community and of the state is really important to everybody economically. Because this is not just a personal risk or your business risk. This impacts municipal bonds and the real estate market and the stock market and like the ripple effects of people not having protection or a good understanding of their risk are profound. And the third axis is really time. How do you think about this? Do you continue to operate on a one year basis and assume that supply in some future state will be plentiful either because it's publicly provided or privately provided? Or do you really want to encourage people to make decisions over time? And what that leads to, which is difficult from a policy standpoint, is if you look at the trend over time, there are places that people live today that they really shouldn't be or won't be able to live in in five or ten or fifteen or twenty-five years. And I think most of us can look at a map and point to those places and say this is not going to be hospitable to human habitation over time. And that's not necessarily if you are a town that's located in that zone or a business or a family, that's not welcome news. So again, that that third axis of time also involves are we trying to preserve where everybody happens to be for as long as possible, or are we trying to get ahead of what the future looks like so that people don't have to move in distress? So that's where I would start if I were sitting down with a policymaker, is to say, you know, these three axes are things that you have to consider. And I think many reasonable people would choose different places on those axes or on those spectra to be. But that feels like a starting framework. ⁓ Versed in in the specifics of of of insurance regulation, but I have a couple of things I think can be helpful for this conversation in the same way. The first is I would say just don't talk about solutions at all. Talk about strategies and pathways. We don't really have a way to solve this problem. We have a way to make it better or worse. We can adapt well or poorly, but we're not going to make it go away. And I do think this is a problem partly created by the climate community, which was a focus on solutions for everything. And the focus on climate change as a solvable problem created a very interesting culture around it, which was this idea that climate wasn't an issue. There will be a brief period where some heroic, well-meaning, and ⁓ really great people will solve it, and then we'll go back to not worrying about it. The implicit promise of the climate movement was you didn't need to worry You kind of need to worry for a little bit of time and then it's going to go away. And so it'll be solved. But this isn't like that. It probably was never going to be like that. We need some amount of awareness going forward. And so thinking about this as a dynamic process, not as a salt solution that's just out of reach, that we're almost about to make one move or change one rule or pull one lever or have one epiphany. It's going to be a process. And so thinking about regulatory, legislative, public policy actions that open up more possibilities in the future are no regrets. I think f focusing on a no regrets framework is really, really useful. This is true generally of adaptation, reacting and becoming more resilient. There are lots of no regrets things to do instead of thinking about let's solve this whole thing. And if you do that, I think you wind up having a mindset that allows you to to Do experimentation. And that idea of experimentation is something that California should be good at. There are lots of places in California, there are lots of domains and districts, there are lots of kinds of organizations and collections. And so you could see the benefits of sort of federalism in America generally as being a kind of open experimentation across space and across communities. And that will be easier. And more fruitful in places where people are committed to place. So the thing I worry most about is that Americans will treat their place as a place they could choose to leave or stay, that that's the main choice. One of my worries about the proliferation of current climate information is it's often used as like, where should I go? And the solution set is very different for any community if people are committed to that place versus if everybody thinks I could just opt out. And so one of the

big conversations is going to be are we in this together or not in it together? And so thinking about this as a community process and thinking about public policy that makes the community aspect of it more resilient, makes the community aspect of it more vivid, more approachable, more useful, I think would make a big difference, as opposed to saying, we're gonna take this away from you in the way that the insurance industry took things away from you. Well just take this worry away and solve it is a very tempting thing for a politician to say and a very bad instinct for this kind of problem. That was wonderful. Thank you both so much for all of that. And I think ⁓ you both just described in like the the act the moment that we are in right now in like very live policy conversations as we approach the end of this legislative session. I hope and maybe we'll just have offer the legislature and all state policymakers. the opportunity to connect with you both because I think what you just mapped out is exactly where we need to go. and how we get there is gonna be is gonna take a lot of a lot of time. But maybe time we don't really have. So yeah, I don't know. I just really appreciate both of you and your perspective here. So all right. So Spencer, I think you brought ⁓ by the numbers for us based on the work you've been doing or what you've been thinking about. So over to you. All right. So I come with one number that everybody, if I had a tattoo, I'm not I'm an untattooed person. If I had a tattoo and it had to be ⁓ numeric, this is the number I would have as my tattoo. And it comes from an exotically named equation, the Clausius-Claperon equation. And the Clausius-Claperon equation tells you how much more water the atmosphere holds if it warms up by one degree. So For every one degree centigrade, or 1.8 degree Fahrenheit, that the atmosphere warms, it can hold 7% more water. So the number is 7%. Okay? This means that if the air goes up by we'll do this in Fahrenheit for our listeners, if the air goes up in temperature by 10 degrees, it can hold roughly 50% more water. That's the power of compounding. If you want to talk about to two people who know a lot about finance, the one thing in finance that really Blows your mind every time is compounding. And so if air gets 10 degrees warmer, it can hold 50% more water. And if air gets 18 or 19 degrees warmer, it can hold 100% more water. And so every time the temperature goes up in California, you look around, you say that air just got thirstier. And thirstier air pulls more moisture from everything that it can pull moisture from. And can hold it up there longer and then can dump it out in buckets. And so that number, which Clausius and Clapperon did it in Celsius for good reason, was seven. You can do it for for centigrade, and it's basically four. but every degree more that the temperature goes up in Fahrenheit, it's about three and a half to four percent more water, and that compounds. And compounding is a heck of a thing. Spencer, I like that because it also explains really succinctly. Why climate change is driving both droughts and floods. I had my son ask me this the other day. How can it be doing both? And it's doing both because it's sucking more and dumping more. Yes? It's sucking more and it's holding more. And so when it dumps, when it releases it, it dumps it out. So more drought, more deluge, and fewer showers. All from one number. Thank you both so much for joining us today. We so appreciated this conversation. I feel like I at least could have talked ⁓ to you all for the whole day here. There's so much. so thank you so much for being here and sharing your insights and perspective ⁓ and for all the work that you both do. Absolutely. Thank you so much. Thank you. You're welcome and good luck to the state of California and all the people in it. California Dream Shot is a production of California Forward, produced in partnership with Pretty Good Productions. Our executive producer is Thomas Clayton Miller and our associate producer is Sarah Walsh. Thanks everybody for listening and see you next time.