News Risk Management 24 Jan 2018

Insurance industry addressing climate change, despite hurdles-Geneva Association

24 Jan 2018

The insurance industry is contributing significantly to building socio-economic resilience to climate change and supporting the transition to a low-carbon economy, even as it is facing some challenges to contribute further, says a new report from The Geneva Association.

Climate change already a boardroom issue

The study ‘Climate Change and the Insurance Industry: Taking Action as Risk Managers and Investors’, which was based on interviews with 62 C-suite representatives (CEOs, Chief Risk Officers, Chief Investment Officers and Chief Underwriting Officers) of 21 global insurers and reinsurers, confirmed that climate change is a topic that has made its way up to the boardrooms of the insurance industry, although insurers are neither the polluters nor the policy setters, noted Geneva Association Secretary General Anna Maria D’Hulster.

Study participants reported initiatives in three aspects of the business: firstly, liability, where the industry already offers specialised risk transfer solutions that address the financial consequences of climate change; secondly, investment, where insurers increasingly integrate climate change considerations into their investment strategies; and thirdly, the operational side, where companies are reducing their carbon footprint, she added.

Challenges still exist to climate change mitigation

However, external hurdles hinder the expansion of the insurance industry’s contributions to climate change adaptation and mitigation. For example, the expansion of effective risk transfer solutions is currently impeded by limited access to risk information and lack of incentive to take up insurance due to post-disaster government aid.

In addition, green investments are inhibited by factors such as a limited capacity of relevant markets to accommodate large-scale portfolio allocations, a need for well-defined asset classifications, and fragmented climate policy and regulatory frameworks.

The participants also indicated that climate resilient and decarbonised critical infrastructure represents an opportunity that poses specific challenges for the insurance industry—insurance companies require risk data to assess such infrastructure projects throughout their lifecycle—from design and construction to operation and maintenance. Additionally they require a stable regulatory and political framework, a robust pipeline of opportunities, and an efficient market.

Dr. Maryam Golnaraghi, Director of The Geneva Association’s Extreme Events and Climate Risk research programme, commented: “Failure to address climate change has been identified as one of the highest potential socioeconomic risks to our society. Building resilience to climate change requires proactive risk management and adaptation strategies, and transitioning to a low-carbon economy needs to align governments and the private sector. The insurance industry plays a crucial role in building resilience and fostering economic and entrepreneurial pathways that address climate change.”

Three recommendations

The Geneva Association recommended three actions to accelerate the contributions of the insurance industry to address climate change:

  • Third party stakeholders such as governments, policymakers, standard setting bodies and regulators across sectors should work in a more coordinated fashion to address key barriers that hinder insurers from scaling up their contribution to climate adaptation and mitigation.
  • The insurance industry should continue to institutionalise climate change as a core business issue, expand its contributions towards building financial resilience to climate risks and support the transition to a low-carbon economy by collaborating with governments and other key stakeholders.
  • Governments and the insurance industry should explore ways to support climate resilient and decarbonised critical infrastructure through the industry’s risk management, underwriting and investment functions.
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