November 6 – Insurance is an essential cog in the global economy, largely unseen but vital to homeowners and giant infrastructure projects alike.
Insurance contracts are like a “permission to act. When you have an insurance company on your side, you can do business,” says Francois Lanavere, head of strategic partnerships at AXA Climate.
But increasingly this vital economic cog is getting squeezed, in large part because of the impacts of climate change.
In a recent report, sustainable investment not-for-profit Ceres explains that the industry is exposed on two fronts – through the assets and activities that it insures, and through its role as a significant investor. And on each front, it faces two risks: a financial hit as climate-exacerbated natural disasters increase claims, affecting returns in the companies it invests in, and a reputational one because of its role in continuing to insure, and invest in, high carbon fossil fuel assets.
According to the European Environment Agency, between 1980 and 2022, weather- and climate-related extremes caused economic losses of assets estimated at 650 billion euros in European Union member states, with more than 110 billion euros of that coming in 2021 and 2022.
While insurers’ role in assessing risk means that they have been aware of the potential impacts of a warming climate for decades, Lanavere says many in the industry still take a short-term view because insurance is delivered through 12-month contracts and underwriting guidelines are reviewed on the same timeline.
One advantage for non-governmental organisations seeking to put pressure on the industry is that relatively few insurers underwrite the fossil fuel sector. “There are thousands of investors in fossil fuels, and hundreds of banks lending to the sector, but in insurance, the top 25 fossil fuel insurers control 69% of the market,” says Peter Bosshard, director of the finance programme at Insure our Future. “If we can move a few dozen insurers away from fossil fuels we can have a major impact on the energy sector.”
Insure our Future started a campaign in 2017, calling on firms to stop insuring fossil fuel companies, and saw rapid momentum in moving insurers away from coal, with 45 companies having committed to end or restrict underwriting in the coal sector.
However, only 25 have done the same for the highly polluting tar sands industry while for oil and gas more generally the figure is only 18, according to Insure Our Future.
“It’s still pretty symbolic in oil and gas,” says Kuba Gogolewski, lead campaigner in Greenpeace’s Money for Change initiative. “The companies in that sector are much bigger than in coal and they are able to create their own companies to insure and reinsure them.”
On the consumer side, a growing number of locations or activities are becoming uninsurable, or at the very least facing rising premiums. State Farm, one of the largest insurers in the United States, has stopped selling wildfire insurance anywhere in California, even for homes not in wildfire zones, while residents of Florida, Texas, Colorado, Louisiana and New York have also struggled to insure homes and businesses. Many insurers have abandoned Florida altogether, with premiums almost triple the national average, according to the Insurance Information Institute.
“It is cynical for insurance companies to abandon climate-affected areas while continuing to underwrite fossil fuel industries,” says Bosshard. Insurers and residents are looking to governments to come up with solutions, but he argues that “it should be the polluters that pay for the costs of climate change, not the insurance industry or the state”.
Ceres says that although insurers are starting to curtail their underwriting risks, “there is less evidence that insurers are making their investment portfolios more climate-resilient”. Yet the incentives for insurers to stop investing in high-carbon sectors are growing as climate events become more intense, insured losses increase, and insurers are withdrawing from a growing list of markets.
Insurers are now having to pay out in excess of $100 billion a year for natural catastrophe losses, and premiums are surging as a result, according to Lloyd’s of London, which recently warned that the worst is yet to come.
Reinsurers increased their rates sharply at the start of the year, one reason why some insurers have stopped offering cover in areas such as California.
In the wake of a year of huge damage caused by natural disasters around the world, next January’s rate-setting is likely to see further rises in premiums and more markets becoming uninsurable, just as customers most need that insurance.
It’s not all gloom and doom, though. In a new report, PWC’s Strategy& consultancy argues that, in addition to significant challenges, “there are real opportunities for insurers that position themselves well in response to a decarbonising world”.
In particular, it notes, the demand landscape for insurance products is evolving, affecting both the assets insured and pricing strategies for insurance products.
One of the report’s co-author’s Elizabeth Doherty, says: “In a decarbonising world, insurers should thoroughly rethink what they sell, how they sell it and to whom they sell.”
AXA, for example, has committed to invest in green assets and divest from coal and oil sands, as well as create new products. It is working with Unilever and Tikehau Capital to create a 1 billion euro fund focused on regenerative agriculture initiatives, says Lanavere.
AXA also set up the AXA Climate School to help corporates in all sectors of the economy, as well as its own employees, to understand how climate change will affect them, drawing on its decades of experience analysing climate risks.
Lanavere says while three-quarters of company directors believe that climate change will be important to their company’s future prospects, according to a survey conducted by the European Institute of Business Administration, almost half said that climate change is only slightly, or not at all, integrated into company investment decisions.
“They know there is a problem, but they don’t know how to approach it, and that is where the insurance industry can step in,” he says.
“We help them to figure out the impacts of climate change in the long term and how they can adapt to them.”
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