Insurers show leadership in risk management related to climate change

Recent findings by Swiss Re Institute reveal climate change to be the largest long-term threat to the global economy with losses of 18% predicted if no action is taken. This “stress test” examined how 48 economies would be impacted by climate change under four different temperature increase scenarios. Modelling revealed that Asian economies would be worst affected with China losing 24% of GDP by 2050 if temperatures were to rise 3.2 °C. The USA, Canada and UK would see a 10% loss in the next 30 years under the same scenario.

It is no surprise the insurance industry is turning its attention to this subject and taking stock of potential fallout due to climate change. In 2018 economic losses related to natural catastrophes reached $215 billion (half of which were insured losses) and 95% of the registered events were weather related. Insured losses in the first half of 2021 reached US$42 billion – a 10 year high. The financial risks climate change poses to the insurance industry have led to many insurers reassessing their involvement with projects and businesses related to fossil fuels. The long term view of their liabilities and the long term investment potential of insurers puts them in a unique position to play a vital role in supporting sustainable infrastructure and facilitating the transition from fossil fuels to clean energy.

One example of this “corporate activism” is the newly formed Net Zero Insurance Alliance. Thomas Buberl, Chief Executive of AXA, the French underwriting firm, heads the group of 8 major insurers and describes the aim of the alliance as “all the insurers applying a methodology to only underwrite companies directed toward climate transition and not to the dark ages of burning coal”.

In addition to this change in strategy from within the industry there is mounting external pressure from groups such as the Insure our Future campaign. The US based group releases an annual scorecard focusing on insurers and reinsurers and scoring their policies on insuring and investing in coal, oil & gas, highlighting what they describe as “leaders and laggards” within the industry as regards climate action.

The impact of these combined efforts on coal companies is becoming evident. Peabody Energy, with operations in the USA and Australia said in its annual report “Increasingly, both foreign and domestic banks, insurance companies and large investors are curtailing or ending their financial relationships with fossil fuel-related companies…This has had adverse impacts on the liquidity and operations of coal producers.” Insure Our Future estimates coal companies face premium increases of up to 40%.

Despite the record losses recorded due to climate change, many insurers still believe withdrawing from the fossil fuel industry now is premature. In its June 2021 report AIG stated “Climate change is a complex issue and the world cannot currently meet its energy needs through purely green technologies…We do not feel it would be in the best interest of our stakeholders and the general public, which expects reliable access to energy, to abruptly reduce or stop insurance access to clients that are heavy users or producers of fossil fuels.”

Though the insurance industry is not unanimous in its retreat from coal and other fossil fuels, evidence of the decline of coal is all around us. Between 2015 and 2018 the number of new coal plants that began construction fell by 84% worldwide. In the US, the proportion of electricity generated by coal was 45% in 2008. In 2020 it was just 24% and continues to fall.

With shrinking demand, stricter regulations on CO2 emissions and green fuels becoming more available, investors are likely to continue to back away from fossil fuels in the near future. As we emerge from the COVID-19 pandemic, the insurance industry’s renewed focus on climate change will contribute to this process. In a September 2021 report released by AXA SA, climate change again topped the list of biggest concerns for insurers. It was also ranked first in 2018 and 2019 (only outranked in 2020 by diseases and pandemics as coronavirus spread around the globe).

“Climate change is back at the top of the agenda,” AXA Chief Executive Officer Thomas Buberl said in a statement. “This is good news, since last year (2020) we feared that the explosion of health risks may overshadow the climate emergency.”

Insurers face escalating challenges from global warming as incidents of extreme weather events resultant of climate change continue to increase. Less than 20% of the 3,500 insurance professionals polled across 60 countries expressed faith in government bodies to mitigate the crisis.