Flooding from Hurricane Sandy in New Jersey, US

Think that climate change will only affect the poor? Think again. With greater wealth and assets than low-income groups, the middle classes face increased insurance costs, reduced property value, mental stress and heat-related illness and mortality. But with increased political clout, they could also be the ones to compel strong action by their governments, according to a new report by UBS, which looks at the middle classes in 215 cities across 15 countries at various stages of economic development.

Globally, 2015 surpassed the record-breaking 2014 for high temperatures, drought, flooding and storms. There were 510 natural catastrophes in the first six months alone. Temperatures in the Pacific Ocean were 3°C warmer than usual. Wildfires in Indonesia emitted as much carbon dioxide as Germany emits a single year.

Overall the estimated total losses attributable to natural disasters last year was 860,000 lives and US$3300 billion (AU$4727b), but only $940b (AU$1347b) of this was insured.

Around the world the total population of the middle class is estimated at one billion. In Australia – where about two-thirds of people are classified as middle class – threats from an increase in extreme weather brought about by climate change include depressed crop yields, mental health pressure and property damage.

In Climate change: a risk to the global middle class, UBS concludes that spending patterns of the middle class are noticeably different in cities where climate change poses more of a risk, such as Los Angeles, Tokyo, Mumbai, Shanghai, New Orleans and Taipei. In such places the middle class spends around 0.6-0.8 per cent more of its household budget on housing compared with a national average (translating to between US$800-$1600 (AU$1146-$2292) more a year), leaving them less to spend on luxury goods, entertainment and household goods.

The report suggests that given the global middle class’s size, spending power and political nous, further erosion of middle class wealth due to climate change could lead to economic and sociopolitical instability. However, the report also sees the middle class as a great opportunity for change in climate policy.

“The middle class has two important qualities that make them critically important to the conversation about climate change: substantial assets and political influence,” global economist and managing director of UBS Investment Bank Paul Donovan said. “If the effects of climate change significantly hurt the middle class, the inevitable reaction should in turn elicit a strong response from policy makers. It is a big reason why the latest United Nations Framework Convention on Climate Change agreement in Paris was signed by all 196 participating countries – the threat is real.”

The report finds that the middle class is slowly adapting to climate change, but at a cost, and is not taking nearly enough pre-emptive action.

The reason why so few people perceive themselves to be at risk from climate change and therefore do not take out insurance until after an extreme event – when it is too late – is due to a psychological handicap we all tend to have. This is identified in the report as a difficulty in identifying the risk level of a low probability-high consequence (LP-HC) event such as flooding or bushfire.

The report offers a two-part solution: increasing insurance premiums to those living in high risk areas, thereby sending a market-based signal; and offering subsidies from public funding to pay for these increased premiums. Those who decide to locate in those regions in the future would be charged the higher premium without the subsidy. The report also recommends well-enforced building codes to help reduce the insurance losses from extreme weather events.

Additionally, individuals need to be presented with information about the level of risk in a way they can understand, for example by comparing it to the risk of an automobile accident. Insurance companies are also recommended to portray the likelihood of an extreme event occurring over a 25-year period rather than just in the next year. Perhaps they should compare climate change risk to the chances of winning the lottery, which may be far less likely and are explored on this amusing web page.

The report urges governments in affected regions take a more proactive approach towards insurability or suffer significant economic shocks.

David Thorpe is the author of:

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  1. Mmmm, I don’t think increased premiums should be publicly subsidised other than for low-wealth demographics.

    People who build in the Blue Mountains bushland on a slope, and then go “but how did this happen? You never think it will happen to you!” frustrate the hell out of me. YES IT WILL FLIPPING HAPPEN TO YOU, it happens in some certain areas with certain characteristics ALL THE (relatively) FLIPPING TIME!!!

    The way it should work, for anybody who isn’t financially poor, and has built in a natural disaster prone area, is thus:

    – If you build & take no steps to minimise the risk/impact (e.g. clearing vegetation from around the property, installing sprinkler system w/ backup) = really high premium (if an insurance company would give you one at all)
    – If you build & take the above steps = a high but slightly discounted premium in recognition of your efforts
    – If you don’t build there and build in a normal area = a normal premium.

    This is turning into a bit of a rant but I am sick of having to either subsidise or getting asked to subsidise people who, despite the plethora of information and warning signs, WILLINGLY put their assets or their personal health at increased risk of damage/destruction by building in natural disaster prone areas, or smoking, or eating junk food, etc etc. UGH!

    PS – yay it’s Friday!!!