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Insurers get serious over climate

Climate change poses a unique challenge to insurance companies, a new report suggests

Joanna England
|Sep 30|magazine7 min read

Climate change poses a unique challenge to insurance companies, a new report suggests

A new report by BCG on the climate change impact to insurance companies, has revealed that the environmental crisis is causing large shifts in the industry. 

According to the report, climate change is not only posing greater challenges in terms of claims and underwriting, but also the direction insurers take when investing in products and portfolios. 

Additionally, the COVID-19 pandemic has caused greater disruption by intensifying the sense of urgency surrounding climate change, by an estimated 70%. Meanwhile, 87% of companies surveyed, felt that companies should include environmental concerns into their insurance products. 

Risk assessment

The first challenge is underwriting and assessing risk. As global warming leads to an increased frequency in natural disasters and resulting claims, insurers, who have based their products on historical data, now find themselves in unchartered territory. 

Risk models no longer accurately reflect the level of todays, or tomorrow's risk. For example, data from the CRO Forum suggests an estimated US$15trn in assets could be at risk from coastal flooding alone. 

In addition, some industries are facing “stranded assets” that have lost value and are no longer producing income. The report refers to the Paris Agreement, which it estimates will result in up to $4trn of oil and gas assets being “stranded” by 2030.

Investment

How insurers can advance efforts to address the climate crisis, is another concern. As a result, companies are leading the way by supporting climate progress. The insurance industry holds pole position when it comes to mobilizing action with customers in the underwriting process. Insurance companies can also take an active approach to investing in assets that thrive because of climate change. 

For example, the global demand for electricity is estimated to grow as much as 30% over the next decade. Experts believe this will also result in $23trn in renewable energy investments in emerging markets by 2030. BCG identified four areas in which leading insurers could combat the climate change challenge.

  1. By underwriting a portfolio that supports action towards climate change.
  2. By adopting investment practices and tactics that drive climate progress. 
  3. By actively working with clients to reduce emissions for internal company operations.
  4. By showing transparency regarding the company’s climate-related risk and promoting efforts to support climate action. 

An excerpt from the report explains; “An insurer that wants to develop a coherent climate strategy should articulate a clear ambition for its effort, identify steps to incorporate that ambition into the company’s core business and operations, and make sure that it has the right enablers for success, including strong leadership and engagement, governance, and robust measurement and incentives.”

Leading the way

The report concluded that insurers should position themselves as leaders when it comes to climate change management. Adopting policies that incentivize customers to have better investment in renewables and re-structuring products to reflect the importance of climate change, will help the industry grow and mature in this relatively new and changing field. 

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