From climate risk to resilience: what insurers must do next

The global insurance industry cannot afford to stay on the sidelines of the ongoing debate around climate change.

Research from 2021 by the World Meteorological Organization found the number of weather-related disasters had increased fivefold over the past 50 years, reflecting the increasing frequency and severity of natural disasters induced by manmade climate change – and, frankly, the insurance industry is going to pay for it, through higher claims.

Insurers have a critical role to play in facilitating the energy transition. By providing financing and insurance cover for research and development of green technologies, the industry can support the shift towards sustainable energy solutions.

Failure to provide adequate insurance coverage for emerging sectors could even lead corporations to seek alternative solutions, potentially sidelining traditional insurers from a significant growth opportunity. 

This is the situation that has arisen in cyber security, where corporations have established captives to cover risks the insurance industry was slow to address. 

To avoid missing out on the pivotal shift, insurers should be taking proactive steps to address the climate insurance gap. The rise of climate insurance is not merely a strategic opportunity for the industry, but a necessity.

If the insurance industry does not act, it might find itself being forced to. For example, the Italian government is planning a significant policy shift that would require insurance companies to provide coverage for properties located in flood-prone areas. 

This comes in response to the growing intensity of climate-related disasters, such as the devastating floods in Emilia-Romagna last year.

The Italian government is exploring the establishment of a public-private insurance model, which would involve government support to make it feasible for insurers to cover more high-risk areas. 

Such a model aims to balance the financial risks between the state and private insurers, while facilitating broader coverage for all properties, including those in the most vulnerable areas, but it is unclear at this stage who will pay most of the bill. There is every chance this legislative model could quickly become the norm across other jurisdictions in the year ahead.

Insurers are uniquely positioned to drive meaningful change by advocating for responsible environmental policies, supporting the development of sustainable technologies, and providing solutions that mitigate the impacts of climate change. 

Failure to do so will not only jeopardise its financial future but also risk its standing and reputation in society, as bad will against the industry increases in line with insurance premiums.

What next?

The industry can effect meaningful change through its core functions of underwriting risk and leveraging financial influence. Acknowledging the inevitability of increasing climate-related consequences is the first step to mitigating their impact.

Practically though, insurers must support efforts to minimise the impact of these changes through new technologies, such as alert systems. 

As an example, investing in and promoting advanced alert systems can help communities prepare for and respond to imminent climate threats, reducing potential damage and saving lives.

More broadly, by promoting resilience and risk mitigation, insurers can incentivise sustainable practices. They can offer premium discounts to businesses and homeowners that adopt climate-resilient building codes and disaster preparedness measures.

Insurers are uniquely positioned to drive meaningful change by advocating for responsible environmental policies, supporting the development of sustainable technologies, and providing solutions that mitigate the impacts of climate change

Beyond underwriting, the industry can invest heavily in green initiatives. As major institutional investors, insurance companies can channel substantial funds into renewable energy projects, green infrastructure, and sustainable technologies. 

Additionally, issuing resilience bonds to finance infrastructure projects can enhance community resilience to climate change, ultimately reducing future claims and benefiting insurers.

Innovation in insurance products is another key area where the industry can make a difference. 

New insurance products tailored to emerging climate risks, such as parametric insurance, provide payouts based on predefined triggers such as rainfall levels or wind speeds, offering quick relief in the wake of disasters. 

Moreover, microinsurance products can provide affordable solutions for vulnerable populations in developing countries, helping them recover from climate-related disasters and enhancing their resilience.

Challenges remain

Perhaps the biggest challenge the insurance industry faces in this arena is the lack of historical data on climate-related losses. 

The sector is in a strong position, however, to address that issue through advanced technologies and collaborative approaches.

Leveraging big data, machine learning, engineering know-how, and artificial intelligence allows insurers to analyse large datasets from diverse sources, such as satellite imagery and weather forecasts, providing more accurate risk assessments.

Collaborating with climate scientists to develop predictive models will further enable the industry to simulate likely future climate scenarios and their potential impacts on insured assets.

By embracing these strategies, the insurance industry can effectively manage the uncertainties associated with climate change and play a vital role in global efforts to mitigate its impact.

The industry must embrace its role in addressing climate change. By joining the debate, financing the energy transition, and helping reduce the impact of climate change, insurers can navigate the challenges ahead and seize the opportunities that have already arisen. 

The path forward requires innovation, collaboration, and a steadfast commitment to sustainability.

Ofir Eyal is partner and director at Marakon