Published by Wendy Kriz on
Estimated reading time: 3 minutes
Wendy Kriz looks at what insurers can do to manage the risks of climate change.
The regulatory and political focus, both national and international, on the effects of climate change and the potential response to these effects, has intensified significantly over the previous few months. Recent publications from the PRA, FCA and EIOPA show us that regulators expect insurers to take action to improve their approach to managing risks from climate change. Though in consultation stages, new EIOPA guidelines are being drafted. This includes, but is not limited to, insurers explicitly disclosing climate change exposures.
What should insurers be doing to assess these risks, in order to ensure compliance and avoid negative publicity?
The issues for insurers go way beyond the obvious short-term physical risks, for both general and life insurers. Some examples of climate change impacts include:
These are first-order risks arising from more severe weather-related events. To manage these risks, insurers need sophisticated methods of modelling and assessing risk. It has been reported that in 2016 and 2017, scientists published at least 41 studies concluding that climate change has led to increased risk of extreme weather events around the world .
Exposure on professional indemnity or Directors and Officers (D&O) risks, for claims of negligence in assessing risks from, or not fully mitigating the impact on, climate change of their company. Claims could come from those who have suffered loss and damage as a result of climate change due to the company seeking to recover losses. These claims may be passed on to insurers.
Widespread disruption in the traditional energy sector and the corresponding rise of “Green Energy” could result in poor investment returns or periods of high volatility of returns for insurers. Indirect impacts will also be seen on other industrial sectors, such as Food and Retail, through the disruption of, for example, supply chains as more severe weather events occur more frequently.
Society is more socially conscious than ever before. As such, in order to attract and retain the investors of the future, corporate social responsibility programmes will become more important for insurers.
We are already seeing an increased level of scrutiny on insurers’ approach to managing the risk posed by climate change. The FCA have dealt with a number of industry complaints involving insurers failing to disclose their exposure to climate change.
For life insurers specifically, how mortality (and morbidity) will be affected by a changing climate is uncertain. It is certain however, that there will be an impact. The specific impact is likely to vary by geographical location and other societal factors such as age.
There are a number of actions insurers can take now, including:
The biggest challenge for insurers is taking these highly uncertain climate change risks and linking them back to what drives their insurance business. That’s where Barnett Waddingham can help.
Wendy is a Senior Consultant within the Barnett Waddingham Non Life team.
For more information, please get in touch: firstname.lastname@example.org.
1Energy & Climate Intelligence Unit