Written by Shobha Joshi
Climate is changing rapidly and these changes are increasingly impacting the world’s population and economies. Over time, the adverse effect of climate change has threatened economic resilience and financial stability and insurers are currently at the forefront. Recent report from Lloyd’s on climate change indicates that more frequent extreme weather events are driving up uninsured losses and making some assets uninsurable.Events such as rising sea-levels, increasing floods, hurricanes, subsidence and wildfires are posing a significant risk. Globally, insurers paid around $50bn USD for natural disaster claims in 2016, significantly more than 2015’s payout of $35bn USD and approximately $123bn USD of losses were uninsured.
Insurance companies across all lines of businesses (health, life, property and casualty etc.) are on the front-line when it comes to the economic consequences of climate risk as they need to pay for these disasters. Due to increasing natural disaster insurers need to increase their premium reserves, claim reserves and capital reserves to prepare for these events.
Now the question is who pays for it? Of-course it’s us “The consumers”. Increasing these reserves result in increasing premiums and thus making it difficult for consumers to take sufficient coverage. Therefore, to stay viable and affordable in long run insurance sector needs to play a big role in anticipating and mitigating these risks.
AXA – Leveraging its expertise to reduce climate risks
AXA is one of the companies who is committed to addressing these risks. AXA is playing an instrumental role in promoting environmental protection awareness amongst its stakeholders and contributing to improve the understanding of global and local environmental risks.
AXA has started few internal and external initiatives as mentioned below:
- As a part of corporate social responsibility, AXA decided to first internally model sustainability in-order to be a credible advisor to customers and other partners. AXA has set-up an annual reporting system to optimize its paper, power and water consumption, as well as the production and recycling of electronic waste. By 2020, they have a target to reduce their current carbon emissions per FTE by 25%.
- AXA has also setup a business unit AXA Matrix dedicated to risk-prevention. AXA Matrix has around 40 years of experience in supporting clients in their risk management policies and is currently working towards reinforcing their climate risk modeling techniques by investing € 20 million by 2020 in geographical underwriting tools to better anticipate where these risks can materialize and cause significant damage.
- AXA has partnered with NGO CARE to spread risk prevention education. Over the past five years, it has helped populations to better prepare for climate-related risks. Moreover, AXA has been supporting CARE to provide emergency responses to populations faced by large natural disasters by raising funds and making its expertise available when and where relevant.
- AXA’s has also partnered with UN Habitat and is working towards disaster risk reduction. The partnership aims to strengthen construction codes and their implementation in countries vulnerable to natural disasters such as coastal areas. This will help reduce fatalities and limit economic losses because of disasters.
Next steps
Finding a viable way to help society adapt to the inevitable changes related to ongoing climate change is vital. Insurance industry’s traditional response such as raising premiums or withdrawing cover will not help deal with the rising risks of global warming. From my perspective 3 key steps that all insurers need to take are as follows:
- Revisit prediction models – Insurers have sophisticated simulation models that need to lead the risk analysis and support climate awareness by predicting climate changes. Insurance companies should partner with universities and research centers to help build new models and use them in their predictions.
- Risk based pricing and Increasing awareness – Insurers need to focus towards educating corporate clients about the importance of environmental risk prevention. They need to take an active role in sharing knowledge about existing and emerging risks, because a better understanding and broader public awareness are critical to combat this risk.
- Behavior steering – As of today, insurance companies do not communicate the true risk premium break-up to consumers, doing this will encourage consumers to refrain from indulging in activities which increase these risks. Insurers can also foster adaptation and risk reduction by making insurance cover conditional on the client taking certain measure to mitigate risks, this in-turn will help to keep premiums at acceptable levels. For example, some insurers now offer “pay as you drive” policies that offer consumers discounts of up to 50% for those who drive less than the average driver. Fewer miles driven will help the environment by reducing emissions. (755 words)
References
https://www.axa.com/en/about-us/environment-climate-change
https://www.lloyds.com/lloyds/corporate-responsibility/environment/climatewise
https://www.weforum.org/agenda/2015/12/3-ways-to-make-climate-central-to-business/
http://www.reuters.com/article/us-disaster-insurance-idUSKBN14O0XG
This is a very interesting write-up. It is a fresh perspective on how climate change can impact a highly unlikely industry. I liked the approach in defining how climate change impacts insurance companies. The focus on improving behaviours of customers, partnerships with NGOs and multilateral organisations to spread empower and aid customers further is interesting.
I would only suggest that insurance companies have joined the group very late. Now that they are concerned, they should multiply their efforts to reach out to more people and companies through stronger programs of mitigating climate change through technological application.