Is climate change insurable?

By Manuel J. Amor Loureda

Since the 1950s, the frequency of weather-related catastrophes, such as windstorms and floods, has increased six-fold. As climate-related risks occur more often and predictably, previously insurable assets are becoming uninsurable, or those already underinsured further compromised.

According to a Climatewise report[1], sponsored by a coalition of the world’s biggest insurers (including Allianz, Aon, Aviva, Lloyd’s, Prudential, Swiss Re and Zurich), the economic impact of these natural catastrophes is growing quickly, with total losses increasing five-fold since the 1980s to around $170bn today. Over the same period, the average annual protection gap (the difference between the costs of natural disasters and the amount insured) has widened quickly from $23bn to $100bn today[2].

So, under this grim perspective for insurance companies, what steps are they taking in order to continue in business? There are several measures that these companies are already taking or exploring:

• Risk carrying:
  • Develop advanced early warning technologies and new risk transfer/ sharing mechanisms, to continue to insure against increasingly frequent catastrophes.
  • Insurance coverage is now becoming dependent on a greater level of action by clients, such as corporate strategies based on the physical and transition scenarios associated with climate change or collaborative local government plans and programmes to enhance climate resilience.
  • Improve data management: near-perfect and available data enables insurance companies to create tailored and dynamic products, to implement instant pay-outs on event, or to aggregate insurance coverage where risks are common (e.g. flood-prone areas).
• Risk management:
  • Insurers engaging earlier in client risk management thinking, in particular for: cities and local governments, in order to educate on local climate changes, use actuarial and modelling capabilities to work with clients to understand and manage climate risks, mitigate the geographic concentration of risk from urbanization or develop comprehensive risk management strategies.
  • Insurers are innovating around product design to viably provide coverage to communities where expected loss ratios are high, traditional distribution channels are gone and financial pay-outs are an unsuitable form of compensation.
  • Change from reactive pay-outs to proactive prevention of incidents and losses.
• Investment:
  • Asset liability models that incorporate climate change scenarios considerate of geographic and sector variations.
  • Leverage data, models and actuarial capability to inform and challenge investee companies and projects on climate risks.
  • Invest in assets likely to help manage risk on the underwriting side of their business, such as in resilience-enhancing infrastructure.
  • Support other stakeholders within the financial markets to respond to the risks and opportunities associated with climate change, including through greater disclosure on climate risk.
  • Change their investment portfolios: many companies are cutting their investments in fossil fuels, as those companies could be rendered worthless by action on climate change, such as policy changes which limit the use of fossil fuels or promote the use of alternative energy sources. For example, Germany’s Allianz SE, one of the world’s largest financial asset managers, will no longer invest in companies if more than 30% percent of sales come from coal mining or if coal generates more than 30% percent of electricity[3]. Axa, on the other hand, will triple its investments in green technologies and services to more than €3bn by 2020 and provide investors with more information on the risk to its investments from climate change[4].

Insurance companies provide a very important role in providing support for people in their time of need, so finding viable ways to help society adapt and become more resilient to the inevitable changes related to ongoing climate change is vital. It is very clear that as carbon dioxide concentrations increase, it is expected to see more patterns of severe weather disruption.

As these companies understand climate change as underwriters, because they try to manage the physical consequences of the severe weather we all get from climate change, they can be a key player in terms of informing policy makers, either in the public or private sectors, helping boost the change from a high-carbon to low-carbon economy.

[1] University of Cambridge Institute for Sustainability Leadership (CISL). (2016). Closing the protection gap: ClimateWise Principles Independent Review 2016. Cambridge, UK: Cambridge Institute for Sustainability Leadership.

[2] University of Cambridge Institute for Sustainability Leadership (CISL). (2016, December). Investing for resilience. Cambridge, UK: Cambridge Institute for Sustainability Leadership.

[3] https://www.theguardian.com/environment/2015/nov/24/allianz-to-cut-investments-in-companies-using-coal-in-favour-of-renewable-energy

[4] https://www.theguardian.com/environment/2015/may/22/axa-divest-high-risk-coal-funds-due-threat-climate-change