Insurers pushing for change
As an industry sector, the re/insurance industry is at the forefront of driving the climate change agenda, explains Martin Bertogg.
There are three main reasons why insurance and reinsurance companies are so active in driving and helping coordinate the approach to climate change.
The first is the fact the industry is covering many of the losses emanating from natural perils and that these losses are on an upwards trend, both from a claims and economic loss potential. Granted there is still a 'protection gap', with many regions of the world uninsured for catastrophe risk, and this is an opportunity for the industry to address the gap and change its approach to underwriting as catastrophic perils become more intense and we experience more weather extremes.
After 12 years of relatively benign catastrophe experience, we witnessed three successive years of heightened loss activity in 2017, 2018 and 2019, with major hurricanes, typhoons, wildfires and floods among the hazards driving devastation and impacting insurers and reinsurers from a loss perspective. Looking at these physical risks from a climate change perspective, none of them is marked explicitly as a 'climate change' event.
Events such as Hurricane Harvey, which stalled over the Houston area bringing significant rainfall and wide scale flooding, appear to have more of a climate change signature in a way that events in the past did not.
The second main reason the industry is such an active participant in the climate change agenda involves the transition to a net-zero carbon economy and how it impacts our business models when considering most if not all insurance companies as managers of large asset portfolios. In many ways this transition risk, impairing the value of some assets, is happening at a much faster pace than the physical climate change-related risks, in some ways accelerated by COVID-19.
As an insurance company, it is a reminder that investment decisions are as crucial as the underwriting piece. As a large asset manager, Swiss Re carefully considers its investment portfolio's ESG credentials as part of our sustainability approach. More recently, the business has also pledged to stop providing coverage to the most carbon-intensive oil and gas companies, where the same step for asset investments had been made already a few years ago.
Such steps are important from a transition risk perspective, but also as we think about our role as corporate citizens. Our own employees are demanding change, with younger staff in particular demonstrating their desire to work for a company that engages in sustainability.
The third key driver of the industry's approach to climate change is regulation. The insurance industry is a heavily-regulated industry and the last two to three years have seen supervisors increase their scrutiny to consider how the physical risks of climate change could impact the industry and if all these risks can be absorbed. This further accelerates momentum in the industry to address both underwriting and asset positions under the header of sustainability and climate change. But also seeing a rich opportunity for insurers and reinsurers to facilitate broader change as we move towards a climate-friendly global economy.
This article was published in Strategic Risk's special report "Climate Change – a truly global risk" in 2020.