Extreme weather and the path to clean energy

With 2023 being the warmest calendar year on record since 1850, Europe grappled with extreme weather events, bringing the growing threat of climate change to the forefront.

Climate change brings a wide array of challenges and opportunities for the insurance industry as a result of trends including more volatile weather patterns, the transition to sustainable energy and the potential for more black swan events such as pandemics.

Against this backdrop, companies need to consider different strategies for climate change adaptation to remain competitive and resilient in the changing environmental landscape.

The rise in severe weather incidents has had an impact on the technical balance in underwriting, as measuring, predicting and apportioning risks accurately has become increasingly challenging because of the unpredictability of these events. Climate change has been compounded by the frequency and severity of adverse weather, putting overall business sustainability into question.

The push from local regulators for increased coverage presents an exciting opportunity for insurers to expand their market reach and develop innovative product offerings to meet the evolving needs of consumers and businesses. However, when considering the likelihood of catastrophic weather events, new risk models are needed, as is a more tenable distribution of risk and value across insurers, reinsurers and alternative risk-transfer systems.

Clean energy transition

Global investments in renewables have been on the rise, with capital expenditure in renewable techno­logy rising from $215bn in 2018 to $495bn in 2022, as shown by Kearney’s The State of Global Insurance in 2024 report.

This is still less than one-third of what is needed each year to hit sustainability targets in the battle against climate change. Insurers can play an important role here and help ensure the success of the clean energy transition.

Specifically, insurers can incentivise carbon-intensive and high-emission industries to reduce their carbon footprint by proactively derisking investments in low-carbon technologies. Not only will this support the transition to sustainable technologies, but it will also require future pricing models to align with the growing popularity of eco-friendly technology.

Further to this, expanding policy terms can help finance the clean energy transition, creating a more favourable environment for investment in sustain­able technologies. Offering more flexible and compre­hensive insurance coverage will mitigate the risks associated with clean energy products, ultimately attracting more investors and increasing the avail­ability of capital.

Growing threat of pandemics

One of the more alarming factors at play is the possibility of future black swan events. Many diseases have emerged over the years, including Sars, Ebola and Zika, all of which have originated from animal populations living in difficult environmental conditions.

The unpredictable nature of future health threats and pandemics casts a dark shadow over the long-term strategies of insurance firms. The Covid-19 pandemic, for example, led to increased claims and investment income decreases for health insurers. 

The potential for future global health crises in the near future is also somewhat of an unknown, with Microsoft co-founder Bill Gates putting the odds of another pandemic within 20 years at more than 50%.

As a result, companies are having to re-evaluate risk assessment models and the development of new products in the face of emerging health threats to society. This shift in approach is crucial for insurers to remain resilient and responsive to the evolving healthcare landscape and consumer needs.

That said, the pandemic also prompted the industry to adapt, with new innovations in remote claims processing and adjustments to policy terms, demonstrating the industry’s resilience and flexibility in the face of volatile circumstances.

Ultimately, changing environmental conditions and healthcare advancements, fuelled by technological progress and evolving consumer expectations, will require the insurance industry to adopt a more strategic approach to future planning. Refreshing product offerings and innovating service delivery infrastructure will be essential as the threats of future environmental shifts will increasingly need to be front of mind. 

Antonio Serrapica is a partner at Kearney