The investment hit from a 2C climate change - FREE

The investment hit from a 2C climate change - FREE

Mercer logoA rise of at least two degrees Celcius in the earth’s temperature could hit insurers' investment returns by 8% per year, Mercer has warned.

Returns for insurers under four different climate change scenarios were analysed by Ravi Rastogi, insurance group leader for Europe at Mercer's insurance investment team, speaking at the Reactions London Market Conference today.

The four scenarios analysed included a two degree rise, a three degree rise and two different four-degree rises. 

Sectors saw varying exposure, with renewables and nuclear business suffering the least, with coal, utilities and materials hit hardest. 

For the minimum two-degree rise scenario, there was an 8% difference between the best and the worst impact over the next five years depending on sector

“Even if it is only 8% per annum and the equity investment in your portfolio is as small as 10% it is still 80 basis points of impact per annum over the next five years projected,” said Rastogi.

“In the current low interest rate environment I would say that 80 basis points is quite material,” he added.

The insurance industry is unique in that it is exposed to climate risk in three different ways, argued Rastogi. 

Firstly, it will be hit by physical losses such as floods and other climate related perils.

Secondly, it risks having stranded assets on the investment side of its portfolio. 

Thirdly, there are liability issues, such as when supply chains are hit and contingent losses take place, for example those factories affected by business interruption from 2011's Thai floods.

“There is a time when an idea comes a long and there is a positive differentiator, when you are seen to be doing something about it,"said Rastogi.

"Then it merges into a regime where it is a negative differentiator when you’re not doing anything about it,” he said.

He believes the sector is now entering that second stage.

“It is a very real issue for the insurance industry,” he added.

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