The emerging impacts of climate change are increasingly felt across the reinsurance industry, with much uncertainty ahead. But the industry now has a chance to transform volatility into opportunity.
Today, forward-thinking insurance companies are driving the global economy by originating solutions that safeguard businesses, governments and communities. More work needs to be done as our role in improving resilience in the economy evolves.
Re/insurers can help solve the climate crisis by matching capital to risk where it’s needed, such as via clean tech solutions, and by de-risking projects and technology development, which will encourage faster and more meaningful investment.
There are three primary ways the industry can help accelerate the journey to net zero emissions (see how Climate Change Impacts on the Re/Insurance Industry).
Climate change, ESG, cyber and the continuing war in Ukraine remain centre stage for the insurance industry, creating both new opportunities for insurers and new challenges from a claims and coverage perspective.
The headwinds that the economy is creating will also prove a significant challenge. Recessions normally mean more claims against professional advisers. For insurers the challenge is establishing which professions will be most exposed this time around.
1. Reinsurers should promote and support the decarbonization
Instead of moving away on arbitrarily short timescales from carbon-intensive and high-emission industries, re/insurers should be enabling and supporting these industries to transition to lower carbon operations.
Climate change, ESG responsibilities and cyber risks are just some of the key concerns facing the insurance industry in 2023
This can be done by both supporting and incentivizing these industries to transition, and by de-risking investments in low-carbon technologies, for example carbon capture and storage and new types of renewable energy.
In order to fully grasp this opportunity, the re/insurance industry must change some of its mindset to formulate a consistent forward-looking pricing model for new risks.
2. Re/Insurers should consider the need for longer policy terms
The industry should consider the need for longer policy terms than our usual annual renewal cycle. New clean tech industries, for example, are often not investable at scale, and re/insurance coverage’s stability and predictability over longer periods could free up capital flows.
This “duration mismatch” is impeding financing for green technologies as the long-term insurability of assets comes into question — which in turn increase risk for investors.
We’re leveraging the existing longer term approach in some existing lines of business and working with new and existing capital providers to increase appetite for longer-term risks.
Working with pension and investment markets could also inform longer-term thinking about assets and liabilities — enabling us to apply these insights to the general reinsurance world more systematically.
3. Re/insurers must collaborate and innovate with stakeholders
The reinsurance industry must collaborate and innovate with stakeholders, including existing and alternative sources of capital, green technology startups, risk mitigation firms and the public sector, so our society can decarbonize at scale.
Decarbonization is changing the risk landscape and any un-insurability of increasingly volatile weather presents a risk to our economy.
But by engaging new talent, partners and stakeholders, the re/insurance industry can play a truly transformational role in the climate transition by enabling better decisions for a more sustainable future.
Moody’s conducted a survey of 30 re/insurers from Europe and North America, and some responses from Asia and Australia about ESG Strategy & Climate Risk Modelling.
The survey has shown that 52% of respondents think that significant changes are expected to current tools and models to incorporate climate risk impacts, or to make them ‘climate risk aware’ (see 4 Key Benchmarks for Insurers to Implement ESG Investment Strategy).
34% expect that climate change will result in acquiring or building new models. This was a common belief among reinsurers.
According to Climate-Related Risks in the Insurance Sector, only 14% of the companies plan to handle climate risk by using their existing risk management capabilities.
A lot of insurers choose to act as ‘front runners’ in the market, they understand that early adoption of voluntary frameworks gives them a few extra years to prepare and test their systems and processes before what may inevitably turn into mandatory reporting.
AUTHOR: Richard Dudley – Global Head of Climate Strategy, Aon