As climate change progresses, severe weather such as flood, winds, and drought will increasingly impact people’s health and wellbeing, as well as the broader economy. Climate change resilience will become increasingly important for society.
The insurance industry has a significant part to play in helping to promote societal resilience, given its expertise in assessing and managing risk and the vital role of insurance as a financial risk transfer mechanism. However, a protection gap is beginning to emerge as societal exposure to climate risk increases whilst insurance penetration declines.
Consequently, some commentators are questioning why the industry has not been more proactive in helping society to enhance its physical resilience to climate risks, particularly
given its potential influence over the broader financial markets. With over US$30 trillion in invested capital, the industry’s asset management activities in particular have drawn increasing attention because of their potential to support the transition to a low carbon, climate-resilient economy. Although the current understanding of the potential financial risks posed by climate change—to companies, investors, and the financial system as a whole—is still at an early stage, the lack of consistent information has hindered investors and others from considering climaterelated issues in their asset valuation and allocation processes. Despite this the role that insurers’ asset management activities have played in respect to climate change mitigation has been prominent, with several of the larger international insurers making recent public announcements of disinvestment, from
carbon intensive assets. However, at the same time there has been much less emphasis on understanding how the insurance industry could use its influence to promote broader societal resilience to climate-related perils.
The objective of this study is therefore to explore the relationship between the insurance industry, its investment activities and its potential support for climate resilience. This has been addressed through an overview of the existing and potential capabilities within the insurance industry’s asset management, underwriting and risk management activities that could promote broader societal resilience to climate risk. This report is intended to act as a foundation for further research and discussion across this crucial area. In order to provide a broad overview, we engaged with a wide range of stakeholders across the industry’s underwriting and asset management activities, as well as a variety of external stakeholders including representatives from rating agencies, engineering firms and central and local
We found that insurers are not the natural investors in resilience infrastructure many external commentators perceive them to be. Whilst there is clearly a strong customer-oriented motive to improve risks through good risk management to reduce losses for an individual insurer there is not a direct relationship between increased investment in resilience infrastructure and increased underwriting profits. However, it is evident that insurers have significant opportunities to support climate resilience across the broader financial markets through three distinct areas of activity:
1. Considering resilience within insurers’ own investment activities,
2. Promoting resilience indirectly across the broader financial markets; and
3. Promoting societal resilience to climate risk in general.
This report identifies a number of specific actions that individual insurers (and other industry stakeholders) can take to promote climate resilience. While the individual impact of these actions may be limited, they could be significant collectively, especially if used to reinforce and support one other.
The report also identifies a major contribution that could be made by a number of industry participants working in partnership. It is notable that there is currently no effective method of measuring resilience: the resilience of investments, of property, of municipalities, of corporates – indeed any entity for which resilience is important. A widely applicable rating system would enable resilience to be considered across many areas of decision-making, including asset management, policymaking, and risk management. For example:
• Assessing the efficacy of actions taken to improve resilience;
• Supporting policymaking and urban planning;
• Supporting resilience impact bonds;
• Setting standards for new buildings;
• Supporting decision-making for investment in resilience;
• Service-level agreements for resilience services; and
• Supporting communication and education.
As a common language readily understandable by a broad range of stakeholders, a resilience rating system would provide a basis for communication. But defining such a system is not easy, and would require significant input and co-operation from many sources. The insurance industry, with its broad range of stakeholders and involvement in so many spheres of economic activity, is well placed to help lead and co-ordinate this effort and many new commercial opportunities could be realised by doing so.
See the full report: