Have Insurers Got Climate Change Covered?

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    Stockholm (NordSIP) – Insurance companies have had a long history of involvement with climate action.  A business model with inherent “skin in the game” and sophisticated in-house risk modelling capabilities helped insurers’ awareness of the need to mitigate climate change and build resilience to its effects as early as the mid-1990s.  They are considered to have been a significant force in getting the Kyoto protocol across the line in late 1997.  Some of the world’s largest insurance companies came together in 2007 to form the ClimateWise industry-wide collaboration under the auspices of the Cambridge Institute for Sustainability Leadership (CISL).  The CISL published the latest ClimateWise progress report on 23 January 2024.

    The extreme weather events seen across the globe in 2023 serve to underline the insurance sector’s deep exposure to climate risk.  The first semester of last year saw natural catastrophe losses of $110 billion, well above the 10-year average.  More than 60% of these losses were uninsured, particularly in the developing world.  As the effects of climate change worsen, even currently covered assets and regions may become effectively uninsurable, hence the industry’s interest in building better overall resilience.  As the organisation puts it: “Insurers are part of this on both sides of the balance sheet, as both de-riskers and investors in the innovation and decarbonisation technology urgently needed for net zero.”

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    The 40 ClimateWise member organisations, which include Allianz, AXA, Swiss Re and other major global insurers and re-insurers are required to subscribe to the following seven principles and report annually on their progress on each one:

    1. Be accountable.
    2. Incorporate climate-related issues into their strategies and investments.
    3. Lead in the identification, understanding, and management of climate risk.
    4. Reduce the environmental impact of climate their business.
    5. Inform public policy making.
    6. Support climate awareness amongst their customers/clients.
    7. Enhance reporting.

    The member firms’ individual scoresheets are anonymised or aggregated in the published report to signal overall progress of the peer group and highlight areas of concern.  The general year-on-year trend is positive, with an average member score rising from 69% to 73%.  The insurers continue to develop accountability by imbedding climate considerations across their governance structures, although they need to provide clearer evidence of “Development of Planned Activities.”  Under Principle #2, the firms showed improvements in the integration of climate metrics, although some will need to provide evidence of timebound targets for the management of climate-related risks and opportunities.  Principle #3 is a particular strength of the sector, but a weaker point under Principle #4 was the firms’ ability to measure and seek to reduce the environmental impacts of their internal operations and physical assets.

    Some ClimateWise members play a major role under Principle #5, for example Aviva who as a member of the Partnership for Carbon Accounting Financials (PCAF) Insurance-Associated Emissions Working Group, contributed to the development of new accounting standards for the measurement of insured emissions.  However, only half of the peer group scored well in this area, with many firms urged to increase their engagement with policymakers as well as their customer base under Principle #6.

    Nordic institutional investors with portfolio exposure to the insurance sector may be interested in exploring how well their investee companies are addressing the challenges of the climate crisis.  The ClimateWise website offers research materials on topics such as investing for resilience and climate product innovation that can inform any such engagement activities.

    Image courtesy of Kelly Sikkema from Unsplash
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