Climate change is an issue which affects us all – as individuals and as businesses.  After the recent COP26 conference and repeated strikes against the insurance industry by climate activists, including protestors spilling 1,000 litres of fake oil outside Lloyd’s, we consider what’s keeping insurers awake at night when it comes to climate change and sustainability.

Many insurers are pledging net zero targets, and with the ABI’s own climate change roadmap setting out a net zero goal by 2050, the industry’s climate change concerns can be split into three main categories:

Investments

Insurers hold £1.7trillion of invested assets across the globe and the industry has been accused of failing to tackle climate change as a result of the climate impact of their investment portfolios.  With insurers being the second-largest group of institutional investors after pension funds, the biggest step they can take to tackle climate change is to become more ethical investors – a responsibility they say they understand.

There is no easy solution however, and as well as keeping investors and stakeholders happy, insurers have many regulatory hoops to jump through – they can’t just invest their funds however they like.  Publication of the Government’s policy paper on Greening Finance: A Roadmap to Sustainable Investing on 18 October was welcomed by the industry and marks a move in the right direction.

Innovation

A move to green technology (including hybrid and electric vehicles) brings challenges and exciting opportunities to the insurance industry. With a need to understand the technology and its impact on risk ratings, opportunities arise for the industry to provide new insurance products to consumers, to enable them to embrace a move toward greener technology.

Other types of electric vehicles, green technology and alternative fuel sources provide insurers with exciting future opportunities to support and encourage accelerated development of these technologies.

Weather-related claims

A warmer climate leads to more weather-related disasters which can be catastrophic for an insurer if not priced correctly.  The Australian bushfires of 2019/2020 resulted in insured losses of $1.441billion according to current estimates, and the bill to clean up after storms Dennis and Ciara in 2020 cost more than £360million.

Floods, fires and storms are occurring at an alarmingly frequent rate.  While Government has a role to play in ensuring flood defences are fortified and appropriate action is taken to respond to these ‘natural’ disasters, insurers too can help consumers to understand and reduce their risks.

Insurers are also working to fund research to help develop insurance and finance led solutions to such disasters, as well as helping to develop tools to understand risks.  The US arm of AXA has announced that they will launch their “Coastal Risk Index” at COP26, which will calculate the risks posed to coastal assets by rising sea levels.

Ultimately then, insurer action is based around looking to the future as much as the present. Whilst weather-related claims are already a key part of the agenda, looking forward to how the major changes in the world driven by the response to climate change – such as technological innovation and greening finance – will affect the industry is an important step too. One thing is clear, that the attention given to climate change as a result of COP26 isn’t going to go away, and dealing with the wide variety of its consequences is key to the industry’s success.

For more information, please contact Natalie Larnder, Head of Market Affairs via NLarnder@keoghs.co.uk