Insurers must solve the climate finance conundrum

As wildfires rage and hurricanes batter coastlines with increasing ferocity, the insurance industry finds itself at the epicentre of a climate-driven storm of its own. It is a storm that proves climate change is not just ravaging communities but is also reshaping the foundations of the financial system that underpins the global economy.

“Over the last 20 years, since the start of the century, an estimated $600bn – or roughly over a third of all weather-related insured losses – can be attributed to climate change,” says Risalat Khan, senior strategist at Insure Our Future. “Not only that, but we also found the trend lines are upwards on this. In other words, the share of climate-driven weather insurance losses is going up.”

This stark financial reality poses an uncomfortable question for insurers from the climate lobby: how can they justify continuing to support the very industries that are contributing to these escalating risks?

The irony is difficult to ignore. In states such as California and Florida, insurers are withdrawing coverage from regions deemed too risky because of extreme weather events, while simultaneously providing the financial backstop for new fossil fuel projects that scientists say will exacerbate these same climate impacts.

“Their main reaction is not to stop fuelling the crisis; it is first preventing this risk on their business, not on our society,” says Ariel Le Bourdonnec, insurance campaigner at Reclaim Finance. “That means reducing exposure, increasing their premiums, or in the worst cases, just a withdrawal from the market, as we saw in California.”

Contradictions

This behaviour reflects a wider tension within the insurance market. Insurers are eager to highlight their commitment to supporting the green transition through new climate-friendly products and services, but many remain reluctant to address their continued involvement in fossil fuel expansion.

“We see a lot about these insurers supporting the transition, but they are avoiding talking about the main issue, which is their support for expansion [of fossil fuels],” Le Bourdonnec continues. “They’re claiming they’re supporting the transition while they keep fuelling the climate crisis by insuring new fossil fuel projects, especially oil and gas.”

Insure Our Future argues this contradiction does not make financial sense. According to their analysis, the fossil fuel industry represents a tiny fraction of the insurance sector’s underwriting income, yet the climate-related losses they are paying out are already exceeding those revenues.

Risalat Khan, senior strategist, Insure Our Future

“When we looked at 28 top property and casualty insurers, we actually found that for more than half of them, the estimated climate-attributed losses already seem to exceed what they’re making in terms of underwriting income from fossil fuels,” Khan reveals.

“The insurance sector, more than any other sector, has a real economic stake in these damages, because they’re paying out. When that hurricane or wildfire happens, they’re the ones paying up,” he says.

Yet many insurers privately acknowledge the complex reality they face. The global economy remains deeply dependent on fossil fuels, which still account for roughly two-thirds of global energy consumption. For insurers, continuing to support these businesses represents the realpolitik of operating in today’s world.

“We know that our world is dependent on fossil fuels,” Le Bourdonnec says, highlighting the grey area insurers must navigate. Major economic sectors from manufacturing to agriculture to transportation cannot function without fossil fuel-sourced energy in the short term, and a precipitous withdrawal of insurance coverage could trigger economic instability that would harm the very communities that insurers aim to protect.

This reality is a delicate balancing act, and one where insurers must consider both climate imperatives and their role in maintaining economic stability during what will inevitably be a gradual, rather than overnight, transition.

Responsible approach

What would a responsible approach to climate insurance look like? Is there a middle path that allows insurers to continue supporting the energy needs of today while facilitating the transition to a low-carbon future?

Le Bourdonnec suggests one clear boundary: “If they want to keep insuring the fossil fuel sector, meaning those projects that are already in operation, fine. But insuring new fossil fuel infrastructure is another topic, and, on this, I don't think there is any middle ground with what the science is telling us.”

This distinction between existing and new fossil fuel projects emerges as a potential line in the sand – one that some insurers are already beginning to draw, at least for certain types of projects.

“We were happy to see Generali, the Italian insurer, last year adopt an approach that covers the whole of the oil and gas value chain, including LNG [liquefied natural gas] terminals,” says Khan. “It still shows that when a company wants to, it is possible to make those kinds of decisions, saying, ‘We will not be expanding underwriting anymore’.”

Generali's climate strategy includes a commitment to "mitigate global warming and develop climate change adaptation strategies". Their policy framework, originally approved in 2018 and updated in July 2023, establishes clear principles to guide decision-making around environmental issues, including the “integration of environmental and climate aspects into insurance and investment”.

The insurer has positioned itself as supporting “a fair and socially just transition to a net-zero emission economy”, laying out measures for implementing this strategy across its core business activities. Yet Khan points out limitations in its approach: “They can still go further, because they have said that the policy only applies to transition laggards. But 96% of the oil and gas sector are expanding. And if you're expanding in 2025, you are a transition laggard. So, it's not a meaningful distinction.”

Reputation

What is driving those insurers who have begun to act? The answer, in many cases, comes down to reputation management – especially for consumer-facing brands.

“Many insurers are famous brands known by the public. Their reputation is their main asset,” explains Le Bourdonnec. “The confidence that we put in their brand is their main asset. So, if there is a threat to this confidence, they will act very quickly.”

Civil society organisations have leveraged this reputation vulnerability effectively, particularly around controversial projects like the East African Crude Oil Pipeline (EACOP) in Uganda and Tanzania.

“When you have this mix of all these issues at the same time – climate, human rights, local impacts – I think you have the perfect cocktail for a project that is dangerous to insure, because there is this potential image risk,” Le Bourdonnec says. “As of today, we have more than 20 insurers that ruled out insuring EACOP.”

'Many insurers are famous brands known by the public. Their reputation is their main asset. The confidence that we put in their brand is their main asset. So, if there is a threat to this confidence, they will act very quickly'

^{Ariel Le Bourdonnec
Reclaim Finance}

Meanwhile, James Vaccaro, executive director at Climate Safe Lending Network, points to the interconnectedness between banks and insurers in the financial system’s climate response. “Banks don’t hang around very long when insurance goes,” he observes, highlighting how insurance decisions ripple through the wider financial sector.

Vaccaro also notes the growing tension between commitment and action within financial institutions, particularly around projects such as the controversial Rosebank oil field in the UK.

“If you're looking at the UK, if you take Rosebank, which is the one the Scottish court said was unlawful, you've got a project which is 90% oil, none of which the UK has got a refinery for. So, it's all being exported. It doesn’t meet energy security needs,” explains Vaccaro. “Any bank who claims they are trying to address climate cannot realistically be financing that.”

Vaccaro also identifies a concerning trend in how financial institutions manage climate risk. “There are two forms of managing climate risk. The first is, how do you prevent the risk in the first place – you stop financing harm, you start financing solutions,” he explains. “Another way of doing climate-related financial risk is just exporting it and pulling out from the places where there’s the damage, and potentially even continuing to finance the harm.”

Regulatory and policy change

While celebrating these victories, climate advocates stress that voluntary corporate action alone will not solve the climate crisis. Regulation and policy changes are essential components of a comprehensive solution.

“There’s a real backsliding where those who had said, ‘Yes, we’ll act on climate, we’ll do the right thing, we’ll go to net zero by 2050, we’re developing plans to do that', a lot of them are going backwards,” says Khan.

Meanwhile, Vaccaro emphasises the critical role of public policy in supporting market transformation: “Look at the example of feed-in tariffs for renewable energy. I started financing wind energy in 1998... now renewable energy in onshore wind farms is the cheapest form of energy in the UK, about three times cheaper than nuclear. It doesn't need that degree of public support.”

James Vaccaro, executive director, Climate Safe Lending Network

The right policy frameworks, he argues, can accelerate private sector transitions: “These support mechanisms, if targeted by policy, by public investment, by various incentives and structures of support, needn’t be in place that long before everybody's doing it.”

He points to retrofitting housing as an example where targeted support can quickly transform markets: “Getting people over the unfamiliar technology and how does it all fit together... the industry learns. It becomes more robust, it becomes cheaper, it becomes quicker, it becomes less hassle. There’s less friction and more of it is done. You see the neighbours over the road are doing it. It’s easier.”

As the industry looks towards COP30, the pressure on insurers to align their business models with climate science will only intensify.

“At a time when costs and risks from extreme weather events continue to go up, and there is a lack of confidence that governments will do what’s needed,” says Khan, “really, no one in a position of power, in a position of meaningful influence, can sit behind the logic of ‘someone else will do it; it’s someone else’s problem’.”

The answer might lie, not in wholesale withdrawal from carbon-intensive sectors, but in using insurers’ considerable expertise in risk assessment to guide clients through the energy transition. By differentiating between companies genuinely pursuing decarbonisation strategies and those expanding fossil fuel infrastructures, insurers can help shape market behaviours while maintaining their crucial role in the economy.

As Vaccaro explains, the emerging business models simply require financial support to scale. Once that support is in place, costs decrease, demand rises and widespread adoption follows – ultimately facilitating the transition.