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The impact of climate change on insurers

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The last few years have seen some of the most severe weather events in modern history. Prolonged droughts, sudden wide-spread fires and unpredictable floods in climates that were once stable, mean they now no longer afford the luxury of being passed over in risk evaluation. Huge losses due to the arbitrary nature of these catastrophes, paired with newly affected areas, have driven premiums up and made some areas totally uninsurable. With insured losses from natural catastrophes increasing 250% in the last 30 years (Reuters: Climate change is hurting insurers), climate change has had a quantifiable financial impact on insurers and will continue to do so.

We spoke to a number of specialists and consultants across IDEX on climate change risks, opportunities and how insurers can tackle potential obstacles and ensure they’re equipped with the right talent and skillsets. 

Climate Change - The risks

“When looking at the risks of climate change, we often approach the topic from the macro perspective of how it’ll impact us globally across the environment in general. Yet I think it can be useful to explore what the consequences are for specific specialisms, not only because it helps to cement the realism and urgency of the situation, but also because it often provides more targeted ways of addressing certain issues, which can be more manageable, and help to instigate other changes”, says Geoff Guerin Strategy and Sustainability Director at IDEX.

Paul Davey, Director for our General Insurance division adds…

“Insurance underwriters are having to assess the risk on their books much more closely. Rather than just using today’s catastrophe models, they’re having to look further ahead, evaluating a multitude of different climate scenarios. They also need to understand what risks there will be in 10 years, both to minimise risk where possible and to proactively identify pockets of opportunity.

Alongside this, climate change brings with it a need to realign talent and various skills. In order to support decarbonisation, insurers need to bolster the following:

  • Systematic portfolio management – Effective management helps to proactively identify risks and ensure there is a plan for each portfolio, subject to testing, and analytical modelling techniques. Accountability for this normally lies with a strategic qualified professional who has the skills and authority to bring teams together.

  • Underwriting new technologies– We’re seeing a scarcity of talent in the profession to underwrite new technologies, especially those which are needed for decarbonisation. Insurers need to build expertise in assessing risk for renewables, like hydrogen, wind, solar and carbon capture which is a completely different risk landscape to what they’re used to.

  • Market strategy – Insurers need to understand how they fit into the broader ecosystem, especially regarding their key differentiators for supporting net-zero and the climate transition. Being able to innovate and adapt their market strategy quickly is key.”

There’s undoubtedly challenges to implementing the above, especially around underwriting complex new technologies. However, research shows that the insurers who are addressing this proactively are beginning to work with MGAs and investors. This way, insurers gain expertise and investment into niche skill areas that enable them to gain competitive advantage. 

Climate change – The opportunity

The reaction to climate change and the need to slow it down represents an opportunity for insurers. In Europe, for example, the EIOPA’s dashboard on the insurance protection gap for natural catastrophes shows that, “currently only around a quarter of the total economic losses caused by extreme weather and climate-related events are insured, leading to a substantial insurance protection gap” (EIOPA: 2023 the role of insurers in tackling climate change: challenges and opportunities)

The road to slowing down climate change and transitioning to net zero will spark the greatest capital reallocation in a century, with an estimated annual investment of more than $9.2 trillion in energy and land use systems.McKinsey advise that taking an aggressive, proactive approach will be critical for carriers to unlock growth and remain relevant in a net zero future (McKinsey & Company: Capturing the climate opportunity in insurance).

The fundamental role insurers will play in making society and the economy more climate resilient is in the creation of innovative insurance products that incentivise and reward climate related risk prevention. Insurers will, however, need to think about competitive differentiation through innovation in climate coverage and risk management services. While this certainly presents an opportunity for insurers, the additional cost of research and development, alongside required resource and talent, will need to be factored in against possible returns. Ultimately, there is a competitive advantage to be had by those that react quickly and aggressively in preparing for a net zero future - decarbonisation means a new risk landscape, niche skillsets and a new approach for insurers. 

What does the future hold?

Auditing an entire specialism and developing new risk models, policies, ways of working and skillsets is timely and costly. 74% of insurers of insurers said they felt climate change had made it hard to insure some areas (Reuters: Climate change is hurting insurers), and The Swiss Re Institute estimates that the premium potential for emerging climate change risks is £800 billion and rising. 

There are, however, opportunities. One recent report found that the US insurance sector held $536 billion in fossil fuel-related assets in 2019, despite some insurers citing climate related risk and natural disasters as a factor to reducing coverage within certain high-risk regions (ERM: 2023 New research shows insurance sector has significant exposure to fossil fuel assets despite vulnerability to climate change)

In a more climate focussed future, successful insurers will be those who partner with specialists and invest in the right talent and expertise to develop and manage innovative insurance products, which encourage climate risk prevention. By proactively supporting sustainability efforts, the insurance profession can be a catalyst or change to help build a greener future. 

Looking for new talent and expertise to support your strategy? Contact Paul Davey, Director of General Insurance on 07375419345 or for advice. 


Carbon insurance Co: The role of insurance in climate transition

EIOPA: 2023 the role of insurers in tackling climate change: challenges and opportunities

ERM: 2023 New research shows insurance sector has significant exposure to fossil fuel assets despite vulnerability to climate change

McKinsey & Company: Capturing the climate opportunity in insurance

McKinsey & Company: Insurance and climate change

Reuters: Climate change is hurting insurers