The WHY: Global climate change is happening, why does it matter to the insurance industry?


The WHY: Global climate change is happening, why does it matter to the insurance industry?

The first in a series of articles on the impact climate change is having on the insurance industry and the impact the insurance industry can have on climate change. First up, why…

Thanos may be old news, but climate change is the new villain on the horizon and we no longer have Iron Man to help us, or do we? Insurance Companies have the power to fight back, so it’s time to step up and be the technology-driven hero that our planet and our economy needs.

You may not be familiar with the world of Marvel, but I can guarantee you have heard of a very real and intense problem: Natural disasters. Catastrophes such as hurricanes and floods are becoming an increasingly regular and devastating occurrence, affecting the lives of millions and costing economies hugely.

They have also been the cause of some of the most significant financial losses for Insurance companies, due to the increased number of pay-outs on claims.

These natural disasters are caused, in part, by the ever rising and changing climate, which is itself becoming increasingly unstable and erratic. As you may well be aware, the U.N Intergovernmental Panel on Climate Change (IPCC) have provided evidence for a ‘point-of-no-return’, claiming that if the world cannot limit the temperature increases to 1.5°C by 2030, then there will be a significantly higher risk of extreme climate-related disasters going forward. The next decade is a ‘window of opportunity’, in which the world can take action to mitigate these risks.

Insurance companies have not always had a heroic reputation, but I believe that they are uniquely qualified to act heroically in the face of climate change.

Your Insurance company needs to play its part in the fight against climate change:

  • To defend the reputation of this misunderstood industry, because this is necessary.
  • To defend your business, because this is smart.
  • To defend the planet, because this is right.

The Villain…

Despite the fact that a stubborn few may insist on taking the ‘ostrich’ approach, remaining in denial about the existence or significance of climate change, it is thankfully now widely accepted that:

Climate change is: a) happening, b) a problem, c) a result of human action, d) within our control to reduce, or even prevent.

Evidence for this is widespread, as much recent attention and research has been dedicated to understanding climate change and its effects. In 2015 the United Nations included ‘Climate Action’ as one of the 17 Sustainability Goals (SDG’s), raising its profile across many platforms. Legislations such as the Paris Treaty and the IPCC Special Report have also contributed to putting climate change action in prime position on the global agenda.

The economic impacts of climate change, and the resulting rise in natural disasters, is also widely documented. For example, here you can read Forbes’ outline of the total economic costs of global climate-related disasters over the last 40 years, which is also nicely summarised in the Statista graphic below:

Defend the reputation of this misunderstood industry, because this is necessary…

It is no secret that the Insurance Industry hasn’t always had the best reputation. Shortfalls in Insurance products themselves, with mechanisms not ‘doing what they say on tin’ at crunch time have often left policy holders lacking in confidence in the value that they are getting for their money. Experts have identified this as one of the key reasons that insurance is viewed by many as a necessary evil, to be purchased often as an afterthought.

It is time to show the world that Insurance, when done properly, is an important and helpful service, which allows people to invest in the protection of all the activities and assets they hold dear and ultimately could be the key to financial longevity in the face of economic catastrophe.

Given their experience, expertise and personal investment in risk management, I believe that the current climate crisis represents an important opportunity for Insurance Companies to continue rewriting public opinion and emphasise the worth they provide to society and the economy through times fraught with uncertainty and risk. In order to do this, Insurance companies will need to aim:

  • To protect people well when catastrophe strikes - We are approaching a time where government solutions may be insufficient in fully protecting people against the new risks they face, and so a solid Insurance sector that ‘gets it right’ will be required to come to the rescue and ensure financial longevity for individuals and economies alike.
  • To willingly share the knowledge that they are uniquely equipped to accumulate - ‘Intelligence is a privilege, and it needs to be used for the greater good of people.’ Dr. Octopus
  • To go beyond just being a source of knowledge to also become a site of action - To avoid being seen as merely the bearers of bad news when it comes to increased climate-related risk, it is crucial that Insurance companies to showing willingness to invest time and money into tackling the causes and consequences of climate change.

Defend your business, because this is smart…

When stripped back to basics, insurance is a market-based mechanism centred around risk transference, and therefore the presence of an element of risk in the first place is, of course, essential. Given this, the changing climate has of course resulted in new business opportunities that the Insurance Industry has embraced.

However, in an industry reliant upon the accurate assessment of risk, the dynamic and unstable nature of climate change poses a significant and special threat to profitability, as the risks associated become increasingly unpredictable. This is evidenced by the fact that every year, the Insurance industry suffers higher volumes of catastrophe losses. The Bank of England’s Prudential Regulation Authority recently found that the since the 80’s, the number of weather-related natural disaster losses reported has tripled.

Many key players in the Insurance Industry have identified the high level of risk that climate change poses to their business, for example, Aviva named climate change as the most significant environmental risk to their company assets.

Given all this, increasing the understanding and knowledge surrounding the risks posed by climate change is, of course, a priority for the Insurance Industry when considering threats to profitability.

I want to challenge Insurance companies to go one step further, however, and shift from a merely responsive position to a preventative one by finding a way to play their part in minimising climate change in the first place.

I would argue that this is the logical course of action for any Insurance Company looking to remain profitable in both the short and long term, as it will reduce the number of losses caused by natural disasters. For an industry that, at its core, is there to provide compensation when things go wrong, surely insurance should have a vested interest in preventing those things going wrong in the first place?

Defend your planet, because this is right…

I am aware, however, that this is a very complex debate, as the effects of preventing climate change for the Insurance Industry’s business model are neither clear cut nor fully predictable. This is where the third motivation comes in to play in a very powerful way, as very few would contest that preventing climate change is in the best interests of the planet and all the people who live on it. If the Avengers taught us anything it’s that the moral course of action isn’t always the easiest. Perhaps any financial benefits that may be earned by preventing climate change should be viewed as a welcome bonus in the face of doing the right thing?

There are endless reasons why Insurance companies should be doing their part to prevent the disaster that is climate change. What do you think about this revolution? Are you being proactive?

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What is your role at Harbour Underwriting?I am the business operations analyst for Harbour Underwriting.