Shaping a more sustainable future

EY’s Isabelle Santenac sets out how the industry can take a bolder role in developing protective measures and preventive capabilities against climate change.

Isabelle Santenac, global insurance sector leader, EY

Even as the Covid-19 crisis lingers on, governments and businesses continue to come to terms with the threats presented by climate change.

According to a 2019 United Nation (UN) report, the impacts will be severe if we fail to meet the goal of holding climate change at 1.5°C. The UN projects a 23 percent contraction of global GDP, a 28 percent increase in the likelihood of category 4 to 5 cyclones and extreme increases in rainfall threatening the habitats of around 275mn people.

In the face of these threats, a massive natural catastrophe-related protection gap has reached $221bn, according to Swiss Re, with catastrophe losses at 29 percent, the same level of two decades ago. Reinsurance gaps are another serious concern, as is the uninsurability of certain assets, such as homes and businesses in areas at high risk of floods and wildfires.

The (re)insurance industry is increasingly engaged. Many in the industry are signatories to the UN’s Principles for Sustainable Insurance, first launched in 2012. These principles embed environmental, social and governance (ESG) issues in insurance decision-making and promote action with governments, regulators and other stakeholders. Climate change concerns are now part of the industry’s regulatory frameworks and capital regimes, with some forward-looking firms committed to becoming carbon neutral by 2050. Still, there is much more work to do.

Proactive sustainable steps

Look past premium increase and embrace prevention: Increasing premiums at renewal to reflect the higher risk is not likely to be an effective long-term strategy, given that affordability is already a critical issue, especially in low-and medium-income countries. Likewise, reinsurance for weather-related risks may become prohibitively expensive for smaller insurers in certain markets. Instead, the industry should develop preventive and recovery services for affected businesses and communities. To reinforce prevention, insurers have a key role to play in spurring innovation in spatial and meteorological sciences, data and risks modeling. They could share more information and data with other stakeholders to enhance prevention and broaden new propositions, such as those around parametric weather coverage.

Partner with government: In December 2019, the US state of California banned insurers from canceling homeowners’ policies in fire-prone areas for one year to enable the government to find future-looking solutions with insurers. The answer is not exclusion of risks, but inclusion of responsibility across government, insurers and individuals. Insurers can help develop certification programs and facilitate building code changes based on leading prevention practices in high-risk areas. Reinsurers are already working with governments around the world to develop low-carbon benchmarks, guidelines for sustainable insurance and open standards for projecting future climate-related repair and replacement costs.

Underwrite and invest for sustainability: Insurers can point industries to more climate-friendly practices. The top 10 European P&C insurers have ceased or restricted coverage of carbon-producing assets, such as coal and oil sands businesses. Looking ahead, insurers can help mobilize capital for building cleaner and more resilient infrastructure, which the public sector can’t fund on its own. Such assets offer insurers strong potential returns with long-term liabilities matching and enhanced portfolio diversification. They also help lower the risk of future catastrophic claims.

The nature of these actions could also help the industry improve its reputation and address its talent gap. Many young professionals want to work for purposeful organizations, especially concerning ESG matters. Insurance companies that clearly communicate and live their purpose will have greater success in attracting the talent they need. No one company or industry can significantly mitigate the risks of climate change on its own. But insurers have a unique and powerful role to play in developing protective measures and preventive capabilities to create a brighter future amid an increase of climate catastrophes.