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April 28, 2021

Tackling the climate change monster

Tackling the climate change monster

Climate change is probably the greatest challenge facing humanity today. The insurance industry is starting to come to terms with how it will respond and adapt.

A charged issue politically, best avoided at dinner parties, yet uncontroversial scientifically. Regardless of one’s perspective, a life with more regular and severe weather-related events, rising sea levels and impacted habitats lies ahead of us. We will need to find ways to cope as well as to deploy strategies to moderate its effects. So much can be done through raised awareness, better planning and mitigation. It all comes down to how we respond as countries, industries, companies and individuals. Broad-based buy-in and collective action is key.

The groundswell of awareness and concern is now increasingly visible in the insurance industry. In 2020, for the first time, insurance executives and practitioners most-often identified exposures to natural catastrophes and newly-emerging risks as a ‘leading challenge’ faced by the industry (and their companies). Rising concerns about climate change was the primary driver of this uplift.

Insurance practitioners most-often identified NatCat and
newly-emerging exposures as a ‘leading challenge’.

Insurers are of course in the business of providing protection against catastrophes, but these elevated concerns signal the landscape is changing, specifically concerns about the rising frequency and severity of events and our general level of preparedness for this.

The deeper significance is that these comments were made with reference to the insurance industry itself and individual companies themselves (as opposed to more generally for society, economies and the natural world). These challenges are not at a distant horizon but essentially immediate in terms of their proximity and timing.

Exhibit 1: Leading challenges for insurers in 2020 – Global

Natural catastrophes and newly-emerging risks were most-often cited as a leading challenge by insurers; within this, those relating to climate change were the most elevated (versus 2019)

Climate change (the dark blue component of the light-blue bar in Exhibit 1) is considered the leading challenge for the industry in UK, Australasia, France, Canada and South Africa. To put that in perspective, ‘climate change’ is considered a greater challenge than any of ‘digital transformation’, ‘social inflation’, ‘pricing adequacy’ and ‘portfolio profitability’.

This can be seen as a signal of good news in that levels of awareness are lifting. It is possible that the Covid-19 pandemic has been a positive catalyst for rising awareness, serving as a striking reminder of humanity’s susceptibility to global, low probability events at large scale.

The extent to which climate change concerns remain ‘top of mind’ for the
insurance industry going forward is our key question.

Time will reveal whether insurers and reinsurers will adopt broader approaches than solely the current use of ‘negative screens’ for excluding certain types of coverages (possibly taking from some ‘more proactive’ strategies from the asset management industry). There are some early trailblazers emerging, although success will depend on winning the ‘hearts and minds’ of government, business, clients and consumers (alike).

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