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Why (re)insurance and action on tackling climate change are inextricably linked

Climate and Resilience Hub

By Adhiraj Maitra and Yingzhen Chuang | November 3, 2021

As underwriters of the world’s assets and major investors, (re)insurers have a cross-balance-sheet role to play in the fightback against climate change, which we hope COP26 will energize.

How the (re)insurance industry reacts and leads on tackling climate change will have a significant bearing on how asset owners are able to mitigate and adapt to the physical and transition risks that they will face in the years to come.

From the time that merchants first came together at the Lloyd’s coffee shop in London to insure ships’ cargoes against losses in sea storms, insurers’ liabilities have always ebbed and flowed with weather and the climate. The increasing volatility of loss-causing, climate-related events, along with related growing financial risks to assets in insurers’ and reinsurers’ substantial investment portfolios, present a dual threat.

Aside from the growing regulatory imperatives or what comes out of COP26, it’s clearly in insurers’ interests to combat the threat – while keeping in mind the opportunities that are likely to be available to them. Climate uncertainty and the wide range of outcomes associated with climate change create potential new possibilities for sustainable, progressive and commercially successful products and strategies.

What is that likely to mean in practice?

Climate risk is insurance enterprise risk

In a recent white paper, The journey to net zero, jointly written with asset manager Wellington Management, we argued that the starting point for insurers is to treat climate risk as enterprise risk. So a risk (or, more accurately, a set of risks) that needs action on both the assets and liabilities side of the balance sheet, with a common approach to quantification and analysis.

On the liability side of the balance sheet, underwriting portfolios will naturally come under scrutiny. The impacts of climate change will extend beyond traditional property catastrophe lines of business. As a result, insurers will need to manage rising uncertainties around liabilities and understand the implications for portfolios in the near, mid and long terms. They will also need to find manageable ways to support clients in the high carbon industries that will face the most pressure on their business models but, equally, can’t just have risk cover switched off if economies around the world are to avoid an unruly transition to lower emissions. This is the thinking behind Climate Transition Pathways, an industry-agnostic accreditation framework for identifying and supporting organizations committed to low-carbon transition.

On the asset side, insurers’ large investment portfolios can influence the sustainability agenda. Investment planning must evolve to account for and capture the range of outcomes – positive and negative – related to the effects of climate change. Insurers needn’t disregard the time-tested strategic asset allocation processes that have served them well; rather they can make climate-specific modifications that supplement and enhance those approaches.

Cohesive, integrated assets and liabilities strategies, with consistent oversight, will be crucial to creating a stable future risk transfer and management environment that meets society’s need for climate action and supports governments and business to address their physical climate and transition risks.

Note: A version of this article was first published on the FT Climate Capital Council forum website.


Global Climate Risk Lead
Insurance Consulting and Technology

Deputy Head of International Catastrophe Analytics, Willis Re

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