Climate Proofing the Insurance Industry June 2014 BLOG POST
Insurance industry can further society’s understanding of climate change and advance creative solutions to minimize its impact Climate scientists are warning that global warming will likely result in severe weather events like devastating storms, heat waves and droughts. This worsening weather poses a growing risk to the longterm viability of the insurance industry and financial stability of insurance companies, and has broad consequences for the economy and society. In the last two to three decades, weather-related losses have risen globally, and the US is not an exception to it. The country has borne the brunt of the climate change; North America in particular has witnessed the largest increase in disasters recently. US insurance industry is already in the course of recovery from insubstantial investment returns and a crawling economy. To minimize losses from catastrophes, different companies have devised different set of strategies. Some insurers like WR Berkley have adopted a strategy to write less volatile risks and instead reserve premiums for achieving higher absolute investment returns – they can be viewed more as a capital allocator than an underwriter. On the contrary, the companies who have stuck to writing high volatile risks have put in place risk diversification and risk-mitigation practices to better manage the impact of volatile weather in terms of insured losses. Insurers are most vulnerable to losses occurred due to catastrophes and climate change, and there has been a long debate if they should come ahead to spread awareness and introduce creative solutions to minimize weather-related losses. After all, avoiding climate change impact by social awareness will in turn reduce the claims from such damages. Insurers have long been using catastrophe models and can certainly help society by applying their expertise in risk analysis. Insurers, including AIG, Allianz, etc., have come forward to apply their expertise in data collection, catastrophe modeling, and risk analysis to track trends and define problems posed by climate change, resulting into solutions for both the industry and society. Insurers can also come up with new products for encouraging environment-friendly behavior by consumers. Usage Based Insurance (UBI) through telematics is one such example of recognizing the link between accident risk & distance driven and co-benefits for the environment. UBI was introduced to incentivize drivers who drive safely, thus motivating them to minimize accidents. Similarly, insurers can motivate commercial customers who take initiative in minimizing greenhouse gas emission and support clean energy. AIG’s Risk Management Green (AIGRMGreen) product line is one such example, through which the company offers advanced insurance policies for property owners and managers of LEED-certified buildings. These positive initiatives will not only motivate policyholders and influence their behavior to adopt green energy but also create new line of products for insurers.
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Thus insurers and the scientific community can work hand in hand to build forward-looking risk models which take climate change into account, with insightful results. Industry experts believe that climate change plays a crucial role in increased catastrophe events but more advanced technological developments helping understand the impact of climate change and frequency & severity of weather events can prepare us to deal with it better.
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