Climate risk is critical to the insurance industry because of the potential impacts and existing protection gaps.
The costs of natural catastrophes increase every year, with claims measured in the hundreds of billions of dollars.
“Once-in-a-century” storms seem to occur annually. Climate change presents unique challenges to the industry, as it affects both assets and liabilities.
It is very difficult to model, extending across long time horizons. Insurers must measure physical risks and those associated with the transition to a greener economy, such as falling auto premiums as fewer people drive. Insurers can play a leadership role in educating society about the risks of climate change.
As investors with assets of more than $30trn, the industry can help governments build more resilient infrastructure to protect against natural disasters. Insurers can also influence the greening of the economy by helping businesses reduce carbon outputs and declining to cover “brown” sectors.
Lastly, they can develop affordable solutions to protect against climate risks. We believe these actions will provide extraordinary benefits to society.
According to Lloyd’s, a 1 percent increase in insurance coverage could reduce the global cost of climate-related disasters to taxpayers and governments by 22 percent.
While consumers were the first to apply climate pressure, investors, regulators and ratings agencies are now involved. Because ESG scores can move stock prices, insurers must become adept in communicating their ESG progress to all stakeholders, meaning transparency and reporting may become competitive advantages.
At the recent 2021 Insurance Industry Charitable Foundation Inclusion in Insurance Forum, we were honoured to lead a discussion of ESG issues, including climate change.
Closing the climate protection gap clearly demonstrates the industry’s noble purpose of protecting individuals, businesses and communities against the most severe threats. It’s worth noting that insurers can strengthen their businesses by living their purpose regarding climate change – a classic case of doing well by doing good.