Insurers invest in climate change mitigation

Insurers invest in climate change mitigation

As the clean-up continues following Superstorm Sandy, there are positive signs that the insurance industry is making more of an effort to manage climate change-related risks, according to a new study published last week in the journal Science. But is it too little, too late?

The study’s author, Evan Mills, a scientist in Lawrence Berkeley National Laboratory’s Environmental Energy Technologies Division, says that with weather and climate-related losses doubling every decade since the 1980s, insurers have been spurred into positive action. “Insurers have become quite adept at quantifying and managing the risks of climate change, and using their market presence to drive broader societal efforts at mitigation and adaptation,” Mills reckons.

Insurers carry a lot of weight, as the study points out, and they’re also aware that where there are risks, there are also opportunities: “Managing a portfolio of $25trn in assets, similar in size to mutual funds or pensions globally, the insurance industry has become a significant voice in world policy forums addressing the issue, as well as a market force, investing at least $23bn in emissions-reduction technologies, securities, and financing, plus $5bn in funds with environmental screens,” the study says.

Pressures from shareholders, regulators, and market forces, as well as three global initiatives have persuaded 129 insurance firms in 29 countries to engage in activities that aim to reduce climate related losses among their customers and cut their own exposure. Steps include:

• supporting climate research;
• developing climate-responsive products and services;
• raising awareness;
• reducing in-house greenhouse gas emissions;
• quantifying and disclosing climate risks;
• incorporating climate change into investment decisions; and
• influencing public policy.

 “Insurers from North America, Asia, and Europe worked with scientists through the three latest Intergovernmental Panel on Climate Change assessments dating back to the mid 1990s to better understand their exposure to climate change risk,” says Mills in a statement. “They expanded these collaborations into such projects as harmonizing economics-based insurer catastrophe models with climate models.”

According to the study, 1,148 climate change adaptation and mitigation activities have emerged from 378 entities in 51 countries, representing $2trn (44%) of industry revenue. For example, insurers have brought at least 130 products and services to market encouraging the spread of more energy-efficient homes and commercial buildings by paying claims that encourage rebuilding to a higher level of energy efficiency after a loss. At least 65 other insurance industry products address the risks and opportunities of the renewable energy industry.

Pay-as-you-drive insurance policies as an alternative to fixed premiums, now number nearly three million according to the study and have the potential to cut car use in the US. “The price signal of lower premiums for miles actually driven could reduce driving by 8%, and oil use by 4%, reducing the cost of driving by $50bn to $60bn per year because of a lower chance of accidents and reduced traffic congestion,” the study says.

On the commercial property/casualty side, the study cites insurance products that insure financial shortfalls if projects underperform at delivering energy savings or low-emissions power generation. Some insurance products manage the risks of carbon-trading transactions, for example. “By assuming these risks and engineering the insured programs to minimize their losses, insurance companies pursue a broader policy objective of verifiable, bankable, persistent emissions reductions—all of which reduce the overall risks associated with climate change,” the study says.

Insurers and reinsurers are also leading by example with their own climate change risk mitigation strategies. Some have implemented programmes to reduce their own greenhouse gas emissions and purchase offsets, and 26 claim they have reached carbon-neutrality, according to the study.

The mangrove restoration project by Tokio Marine and Nichido Insurance taking place in India and south-east Asian countries, is one example. Started in 1999, the project is close to restoring more than 20,000 acres of mangrove forests in coastal areas of seven countries. Mangrove reforestation reduces the exposure of coasts to storm damage, and also helps sequester carbon.

The push by some insurers and reinsurers into microinsurance in developing countries has included integrating actuarial and environmental sciences into insurance models: some of the products incorporate remote sensing and climate-sensitive methods to analyze the risks to crops and livestock.

There are plenty more opportunities for insurers to expand innovation in the industry, Mills believes. “The federal government is the insurer of last resort for floods and crops in the US, but these climate risk techniques have not been applied to federal insurance programmes,” he says in the study. “There’s also not much research in the field of loss modelling under future climates, or comparative risk assessments of climate change response options, which could help guide policymakers about how to adapt to changing climate.”

The planet needs much more positive action and fast. The latest climate science prepared for the World Bank by the Potsdam Institute for Climate Impact Research (PIK) and Climate Analytics, also released this month, says that the world is on a path to be 4 degree Celsius warmer by the end of this century - and current greenhouse gas emissions pledges will not make much of an impact.

The Earth system's responses to climate change are non-linear, explains PIK Director, John Schellnhuber: “If we venture far beyond the 2 degrees guardrail, towards the 4 degrees line, the risk of crossing tipping points rises sharply. The only way to avoid this is to break the business-as-usual pattern of production and consumption."

Latest Issue

November 2018

 

In this month's Reactions

  • Mike McGavick interview
  • Baden Baden roundup
  • SIRC roundup
  • PCI roundup
  • Reactions North American Conference 
  • Reactions North American Awards
  • Aerospace 1/1 renewals
  • Solar power reinsurance

CLICK HERE TO READ THE LATEST ISSUE

 

Follow Us on Twitter @reactionsnet

Catastrophe Centre

Catastrophe Centre