The climate crisis has made the world increasingly realise that we must take a new, more sustainable approach to everything – including the insurance industry. Catastrophic impacts of climate change are already being felt by people and businesses worldwide, with weather-related disasters killing thousands of people and costing the world over $95 billion every year. This new reality has left insurance companies scrambling to find ways to protect their business from climate change and help the world move towards a more sustainable future. Here are three key drivers of sustainability in the insurance industry:
1) Unpredictable Price Modeling
One of the biggest challenges for the insurance industry is predicting how climate change will impact pricing. In the past, insurers have been able to rely on historical data to price policies and plan for future risks. But with climate change, long-term weather patterns are becoming increasingly hard to predict, making it difficult for insurers to price their products accurately. For example, a Property and Casualty (P&C) insurance company may have to price their policies for 2023 before they know what 2022 will be like. And that could be a dangerous bet. According to a recent study by Stanford University, 19% of national crop insurance losses over the last two decades have been attributed to rising temperatures in the United States. Climate change has made it increasingly challenging for insurance companies to create sustainable pricing models that are fair for their customers and themselves.
2) Reputational Risk
As the world becomes more aware of the impacts of climate change, insurers are beginning to face a reputational risk for their role in exacerbating the problem. Insurers have increasingly been called out for their role in funding the fossil fuel industry, which is one of the main contributors to climate change. This is a significant concern for the industry, as it could lead to a loss of customers and impact their bottom line. Earlier this year, dozens of underwriters refused to insure a thermal coal mine contractor due to environmental, social, and governance (ESG) risks.
Insurance companies are not only protection providers. They are also investors that need to protect their investments. With the recent divestment movement gaining steam, insurers are looking for sustainable investments to protect their assets. They are also facing pressure from shareholders to take action on climate change, leading some of them to divest their holdings in the fossil fuel industry and invest in renewable energy instead. According to Bloomberg Intelligence’s (BI) most recent report, ESG assets are expected to exceed $50 trillion by 2025, or more than a third of the projected $140.5 trillion in total global assets under management (AUM). That appears like a huge investment opportunity for insurers looking to back the right industry.
3) Increased Demand for Green Insurance
As the world becomes more environmentally conscious, there is a growing demand for green insurance products. These policies consider environmental risks and offer coverage for things like climate-related damage, renewable energy projects, and carbon offsets. According to a recent study, more than half (57%) of customers would appreciate receiving expert recommendations on how to shop more sustainably from their insurance company? or bank. This rate was even higher among millennials and Generation Z (67%). The choice is clear: insurance companies can either create green products to meet these demands or lose out on a growing market.
