To better understand how insurers are addressing climate-related changes, the National Association of Insurance Commissioners (NAIC) requires insurers to file a Climate Risk Disclosure Survey that provides a discussion of how companies are addressing these risks and opportunities and integrating them into their governance structures, strategies and risk management.
We have reviewed many of these surveys. What is quite clear, albeit not surprising, is that insurers recognize that they face increased risks from chronic and long-term changes in climatic patterns but, importantly, they are well organized to deal with continuing and impending threats.
What is also clear from the disclosure, and perhaps less appreciated, is that insurers also foresee transformative opportunities. Specifically, these opportunities are expected to come from policies with risk control and loss prevention services. These policies help clients mitigate and build resilience to physical and climate risks. They also see underwriting opportunities in evolving and emerging technologies and industries.
Since insurers are investors as well as underwriters, they also see opportunities in allocating capital toward the energy transition and decarbonization efforts that occur in response to climate change.
The risks are well known but can be managed
Insurers are exposed to a wide array of physical and transitional risks stemming from climate change.
The physical risks arise from the increased frequency and severity of extreme weather events. These events, in combination with population growth and various socioeconomic factors, are likely to keep payouts climbing.
In addition to physical risks, insurers are faced with potential governmental responses to climate change that create conflicting policies across jurisdictions. This could lead to restrictions on insurers' ability to manage exposures and mandated coverages. There could also be higher compliance expenses, and costs for managing additional regulatory standards, especially those that require more disclosures.
Together these risks cannot be downplayed because they can have significant financial implications for insurers. However, the risks are well known, and managements have the right strategies and tools to deal with the issues.
But insurers also see underwriting and investment opportunities. They are expected to come (1) from policies with risk control and loss prevention services that help clients mitigate losses and build resilience, and (2) from coverages for emerging technologies and industries. Since insurers are also investors, they see opportunities in allocating capital toward energy transition and decarbonization efforts.
Mitigation and resilience
With higher climate-related losses in the future, mitigation will be critical to maintaining coverage availability and affordability. To do that the insurance industry will evolve from one that simply pays claims to one that has a critical role in helping policyholders reduce losses.
Hence, the key opportunity will come from designing policies with financial incentives to change behavior. This will be done not just for individuals and corporations, but also at the community level. Some resilient home incentives we expect to see expanded in the future are fire-resistant improvements, and elevated buildings in flood zones, among others.
In addition to offering products to reduce losses, insurers also see opportunities in designing coverages to enhance the ability to recover and adapt after events occur. Thus, insurers foresee the continued development of parametric insurance tied to climate indices (e.g., rainfall, temperature, and wind speed) that enables rapid payouts post events.
In addition to underwriting products, insurers see opportunities in offering comprehensive risk control and loss prevention services. These services include evaluations, technical information, consulting solutions, and educational resources to help clients reduce exposure to physical and climate risks.
Coverage of the latest technology
Insurers (as well as many others) expect that in response to climate changes there will be a gradual transition to clean energy technologies, infrastructure, and processes which will require insurance coverage.
These are some examples of what insurers note in their surveys:
- Renewable Energy Insurance: Coverage of onshore and offshore wind farms, solar farms, green hydrogen facilities, battery storage, hydroelectric plants, and energy conversion risks.
- Climate Technology Insurance: Coverage for climate technology developers, EV charging stations, and suppliers of solar panels and photovoltaic inverter solutions.
- Green Building & Construction Insurance: Product tailored for LEED®-certified construction, green upgrades in buildings, and construction projects focused on climate patterns like flood control, waterproofing, and fire safety.
- Electric Vehicle (EV) Insurance: Developing products and services to meet EV owners' needs, including specific EV policies, roadside charging coverage, and discounts for hybrid/electric vehicles.
On the investment side, insurers see climate change as an opportunity to generate attractive, risk-adjusted returns by deploying capital toward the global transition to a low-carbon economy, supporting emerging climate technologies, investing in green and municipal bonds, and enhancing community and infrastructure resilience.
Insurers anticipate that opportunities will continue to arise related to innovative technologies and solutions across a wide range of asset types. Among others, this includes support for climate change infrastructure, clean transportation, green buildings, pollution prevention, and sustainable water and wastewater management.
Conclusion
There is a natural tendency to view climate change negatively for insurers. But the world is adapting, albeit at a sometimes inconsistent pace, and the insurance industry has the opportunity to take a leadership role in this transition.
The bottom line is that insurance is a risk transfer business. Greater risks can lead to higher growth and enhanced returns if properly managed.
