The Paris Agreement on climate change came into force in November 2016, a clear signal of international commitment to decarbonisation to contain the negative impacts of climate change. That momentum has been maintained over the last year since the negotiations last December.
At the same time, there is a widening of the global protection gap – the divide between economic and insured losses. This is particularly the case in developing countries most vulnerable to climate impacts. The trends of climate change, the transition to a low carbon economy and a growing protection gap will require the insurance industry to evolve and broaden its role in society to manage the impacts of climate change. This will involve influencing authorities to ensure a more enabling environment for insurance, increasing the availability and reliability of technology-enabled data, and, crucially, moving beyond financial risk transfer and ensuring greater collaboration across sectors and markets to increase societal resilience. The low interest rate environment and the structural growth inherent in emerging economies may just be the right incentive for the insurance industry to further venture into those economies and geographies most vulnerable to climate risks. Does the progress made by the ClimateWise members in 2016 show they are ready and well placed to do this?
The 2016 ClimateWise Principles review continues to demonstrate how members are evolving their management of climate risks and developing their roles as key risk managers to societies and economies. Overall, this year saw a continued rise in the average performance score up to 59 per cent from 56 per cent in 2015. Four leading members have now exceeded the 80 per cent mark of high performance, compared with just one member last year.
Unsurprisingly, ClimateWise members have demonstrated that over the last year they have played active roles in leveraging their insight to inform policy making and influence the climate change agenda, in particular before, during and after the Paris climate negotiations. Members show marked improvements in conducting research, improving data quality regarding climate risk, and using the outputs of these activities to inform business decisions and strategy. Members also disclosed how they are increasing their efforts to provide customers with better information, tools and services to help them assess their own exposure to climate risk.
Despite another increase in overall average score about a third of members remain below 50 per cent, still struggling to integrate climate change across their business. There was also a notable decrease in disclosure regarding members’ efforts to evaluate the implications of climate change on the performance of their investments. This is a disappointing development given the broader advances made across financial sectors in
understanding climate risk in investment portfolios, and the warning in last year’s Prudential Regulation Authority (PRA) report that the transition to a low carbon economy may impact insurance companies’ investment portfolios.
In this report we highlight some of the developments that will impact the insurance industry in the coming years. We look at the work of the Financial Stability Board’s (FSB’s) Task Force on Climate-related Financial Disclosures and how the industry will face higher expectations from investors, rating agencies, regulators and other stakeholders as a disclosure provider, but will also benefit as an underwriter and investor from an increase
in risk data in the market. We also explore what climate change means for the ‘insurer of the future’ and how the industry should be looking ahead to review the adequacy of their corporate resources and structure.
Overall we are seeing steady progress from the ClimateWise members in managing climate risk across most aspects of the business, but this is still lagging behind the step change witnessed in international political commitment to addressing climate change in the last year. Members must ensure this opportunity – to support clients in understanding and managing risk, to provide solutions for closing the protection gap in vulnerable geographies and to deploy investments which decarbonise and build climate resilience in the economy – is understood by key decision-makers and embedded in thinking across the corporate ecosystem. This is the vision of the ClimateWise Principles and the Paris Agreement has made the Principles more relevant than ever before.
See the full report: