Mounting uncertainty relating to climate change has been hanging over the global community for many years – and it is only in comparatively recent times that “real-world” solutions have been suggested and their implementation initiated in earnest. Today we will discuss how climate change will influence the global insurance industry.
Extreme weather, an increase in the severity and regularity of natural disasters, and rising sea levels are just a few of the consequences of the climate emergency that we are already beginning to experience across the world.
Of course, these destructive events are likely to put greater pressure on insurance agencies, as they present a number of major risks and complex challenges that must be overcome in order to provide effective protection and financial security to businesses and the general public.
In this article, we explore a few of these challenges and discuss how the insurance industry may need to change as the climate crisis continues to gather speed.
Whilst the risks presented by climate change to the global insurance industry are many, varied, and complex, there are a few basic issues that must be addressed when considering insurance premiums and the capacities of different types of cover.
Acute physical risks are presenting themselves with increasing regularity and seriousness due to the rising number of major hurricanes, floods, forest and bushfires, droughts, storms, and instances of extreme temperature.
Growing levels of damage have also been recorded over the last half-century, resulting in greater repair and rebuilding expenses.
Much of the recent increase in earthquake seismic and volcanic activity can also be attributed to climate change. As a result, particular global regions may require reclassification as time goes on.
This is likely to influence significant changes in the insurance assessment of certain seismic zones.
Rising Sea Levels And Temperature Changes
There are also chronic physical risks to property, health, and life connected to the rise in sea levels, which is creating greater numbers of flood zones and exacerbating existing flood risks.
Furthermore, in the long term, temperatures may adjust to such an extent that certain regions may experience extremes where they did not before – which will necessitate an adjustment of the insurance policy types available in those particular locations.
An Increase In Claims
The above factors are likely to have a direct impact on insurance agencies, with a rise in the number and value of claims becoming ever more likely.
In particular, with the increase in the frequency of major natural disasters, there is a strong possibility that providers will receive large volumes of insurance claims over highly concentrated timeframes. This in turn will lead to a vast increase in underwriting risk.
The Potential Solutions
The swiftly-evolving nature of risk in a world that is already heavily affected by climate change is an extremely complex matter.
The potential threats to most local, national and international markets pose significant challenges.
“There is a very real possibility that the cost of insuring a home or business in certain parts of the world may eventually outstrip the means of both insurance policyholders and providers,” comments Ruban Selvanayagam of private property sales and buying company (Property Solvers).
So what can be done? There are a number of approaches that may be considered in order to protect the insurance industry and its clients and stakeholders.
Risk mitigation, and the provision of proof thereof, are likely to be increasingly vital as we continue to tackle climate change.
Homeowners and business leaders must be given the opportunity to adapt and adjust to a changing environment – and it is important that insurers and authorities are able to work with them to ensure that the means to do so are accessible and affordable.
Traditional insurance policies may not be suitable for companies and households significantly affected by climate change. Where this is the case, new products may be developed and carefully tested to ensure their efficacy and to avoid blind spots.
In some cases, entire business models may need to be revisited and revised.
As is the case with all other industries, insurers must be willing to play a part in tackling the root causes of climate change.
The investing techniques employed by firms of this kind should be overhauled, with a focus on ethical organizations and funds.
Historically, certain industries and organizations have been more challenging to insure than others.
With the growing threat of climate change presenting more challenges than ever, there is growing pressure on businesses with high carbon footprints to reduce their impact and seek to pursue more environmentally friendly methods.
To that end, one suggestion that has been presented is that insurers should be more selective and exacting when it comes to high-carbon clients, requiring a higher level of risk mitigation and proof of suitable efforts made to reduce their footprint before cover can be provided.
There is even the potential for insurance companies to offer certain attractive products as incentives to companies that can provide clear evidence of an effective stance against climate change.
Of course, there are two main schools of thought on this issue. The first is that insurance is – to all intents and purposes – a functional resource that has no place within a “moral” campaign.
The other is that climate change is directly threatening the role of the insurer and potentially making cover more difficult to achieve, and less affordable, for potential clients.
From this perspective, a more hardline approach to less environmentally friendly stakeholders could be argued to sit well within the interests of the insurance industry.
The true extent of the impact of climate change on the global insurance industry will only be seen with time.
If world leaders and major businesses are successful in reducing waste and greenhouse gas production to net zero by the UN’s target of 2050, there will be no need for a major overhaul of insurance products and practices in the long term.
However, as things currently stand, policy providers must now begin to make strong plans to protect the insurance industry – and the businesses and households that are dependent upon it – in order to mitigate current risks.