It’s been fifty years since I had a minor role in The Merchant of Venice, but I’ll have to settle for that as my credential for claiming to say what the play is really about. Google says that “The Merchant of Venice is a Shakespearean play about friendship, love, prejudice, and the conflict between strict justice and mercy” – but that’s what happens when generative AI ingests the play’s most-quoted lines, including “The quality of mercy is not strained”; “If you prick us, do we not bleed?”; and “The devil can cite scripture for his purpose.” I’ll have to live with being an outlier, when I say that The Merchant of Venice is actually about the vital role of insurance in enabling society to function in a world of uncertainty and risk.

And yes, this does have something to do with how we handle the challenges of climate change – but I’ll need more than one short scene to make my point. Even in its first scene, though, before it gets to the juicy speeches on bigotry and vengeance, Merchant has given us this (my boldfacing added):

Your mind is tossing on the ocean… Had I such venture forth,
The better part of my affections would be with my hopes abroad.
I should be still plucking the grass to know where sits the wind,
Peering in maps for ports and piers and roads; and every object that might make me fear
Misfortune to my ventures, out of doubt would make me sad.

If it weren’t for these worries of Antonio (the actual “merchant of Venice” of the title of the play) about the risks to his cargoes at sea, his purchase of insurance from Shylock—“Go with me to a notary, seal me there your single bond”—would never arise as one of the two main pivots of the plot. That’s why the true TL;DR of this play is, I dare to suggest: if it can’t be insured, it can’t get done, or at least it can’t be done at scale or for any long period of time.

This is why conversations about recognizing climate impact do well to consider insurance markets as indicators – and also, in consequence, why we need to notice and overcome dysfunctions of insurance markets, if we don’t want those distortions to delay important decisions or hinder needed actions.

I’ve previously proposed specific insurance markets as indicators of risk – but I’ve also noted that the marketplace of consideration and pricing of risk is no longer firmly based on (what I presume to call) my Three Laws Of Insurability:

• many different parties are exposed to common and familiar risks,
• with magnitudes that can be estimated from past experience and present observation,
• but uncorrelated in that any one party’s damage from that risk is unrelated to any other party’s likelihood of the same thing happening at the same time.

Breakage of these laws seemed imminent this morning, when I was reading today’s foreboding prospects for global supply chains – even in the most optimistic case of Strait of Hormuz hostilities ending this Friday. Emmett Lindner said it plainly at The New York Times:

There are two reasons that [oil] prices could linger on the higher end. One is the large amount of infrastructure in the Middle East that has been damaged or destroyed, some of which will take years to rebuild. The second is an increase in the cost of oil because of uncertainty about whether sailing through the Strait of Hormuz is safe. “Basic economics tells us the riskier business is, the higher profits you have to earn to want to enter into that business,” said Christopher Knittel, a professor of energy economics at M.I.T. “Oil and gasoline and natural gas has gotten more risky. That might actually keep us from ever getting back to prewar levels for gasoline.”

To be quite clear (I hope), there’s plenty to like about an enduring step-change increase in people’s desire to weaken their dependence on oil and gas. As noted here in April, citing a quotation from the French newspaper Le Monde: “A nuclear power plant, a solar or wind farm, a heat pump, an electrolyzer, a biomethane plant, a building renovated to passive standards – all these assets have in common that they produce or save energy at a predictable cost.” Even with the positive impacts, though, of increased oil and gas aversion, there’s a larger question of being able to undertake any large project at scale if the marketplace of risk becomes a ghetto rather than a shopping mall.

I widen the scope of this to the entire insurance industry, because Dr. Knittel’s comments hit my news feed at the same time as this observation from Lee Harris and Toby Nangle at the Financial Times – where they were talking as much about AI-related risks as they were about climate change:

A handful of disasters in regions with high asset prices — coastal Florida, earthquake-prone California and Japan — can end up distorting the broader market. “You could get a political risk insurance buyer in eastern Europe, for instance, asking, ‘Why are we paying more because there just was a Florida hurricane?’” says David Flandro of broker Howden. Insurers are already modelling scenarios in which AI agents unleash chaos…[and] such losses could potentially become systemic.

“The insurance industry can afford to pay a $400mn or $500mn loss to one company that has deployed AI that gave the wrong pricing on airlines, or gave the wrong healthcare diagnosis,” says Aon broker Kevin Kalinich. “What they can’t afford to pay is if an AI provider makes a mistake that ends up in 1,000 or 10,000 losses — a systemic, correlated, aggregated risk.”

Systemic. Correlated. Aggregated. Terrifying words, but worse still when the entire capital environment of insurance is in transition. “The disconnect between risks and prices is a striking example of how waves of big money have distorted even the most established of industries. It is a phenomenon that in the case of insurance has pushed down premiums — a trend people in the industry worry cannot be sustained,” warn Harris and Nangle in the FT story quoted above. “After a run of disasters occurs, the accompanying surge in claims drains insurers’ reserves of capital and pushes some out of business.”

As sorry as we might feel for the insurance companies, I’m somewhat more concerned about the devastation of those who thought they had insurance – but merely had uncollectable claims. If risk turns out, after the fact, to have been underpriced, it is little consolation to know that the insurer has gone bust along with the insured. The planet’s transition to a lower-carbon economy depends on big things getting done, which without a functioning and trusted insurance market will be far less likely to happen.

“It appears by manifest proceeding that indirectly, and directly too, thou hast contrived against the very life of the defendant,” admonishes Portia in Act IV of Merchant – but it doesn’t require contrivance to create market failure. It only requires, again in the words of Harris and Nangle, “the prospect of high returns tied to random events rather than expected swings in monetary policy or corporate performance [that] has made the [insurance] sector hard to resist… The glut of investment capital outstrips the insurable value of assets.” That’s not sustainable.

Tomorrow and tomorrow and tomorrow (with apologies to The Scottish Play), it’s perhaps not going to be about new technology – or even about new threats. It’s going to be about the math and the money of markets in risk – which have been with us long enough that Shakespeare made this a plot device more than four hundred years ago. Let’s not learn it all over again.