How Climate Change Impacts Insurance

5 Things You May Not Know About How Climate Change Impacts Insurance

The climate crisis can stir up muddy waters for insurers

There is little doubt that weather events and catastrophes are happening more frequently, with worsening results. We don’t have to look any further than the wildfires in California, floods in Oregon, Alabama, New York and New Jersey, and ice storms in Texas to know that storms are causing much more damage than they ever have.

Climate Change Impacts Insurance

Here are five things you may not know about what this means for the insurance industry: 

Historical Data May Not Reflect the Full Cost of The Risks From Climate Crises

While the climate is changing at a slower pace, one thing we know about weather and climate risk is that it changes quickly. Historical data for insurance policy revisions becomes much less useful as climate risk escalates. 

Common catastrophe models quantify the financial impact of a range of potential future disasters, mostly based on historical data. They are supposed to inform users of the location and intensity of likely future catastrophic events. However, they no longer accurately project risk because the climate behaves differently now. Modelling may not reveal the true extent of the risk for both the insurers and the insured, which means their interests don’t match up.

Some Companies Quantify the Risks From Climate Change

Some corporations are engaging companies to evaluate climate change risk management for them. Using climate projections and data on assets, these companies are able to measure the climate risk from severe weather, floods, wildfires, drought, heat and wind, and the cost incurred by a disaster. 

Consumers Will Shop Around for Their Insurance

It’s no secret that insurance costs are rising to mitigate the risk of climate change events. Consumer behaviour used to reflect a lifetime commitment to an insurance company, but not so much anymore. As climate change risks rise, consumers look for the best coverage at the best price, or work with a broker who can find it for them. 

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Insurers Can Help Organizations Mitigate Climate Risk

We’ll look at this more in-depth in a future post, but the short of it is, insurers are in the business of mitigating risk for customers, but they should also focus on mitigating climate risk. Shifting business models to scale up incentives – such as rebates for using eco-friendly and resilient materials or providing access to wildfire defense or relocation services – and fostering direct partnerships with customers is more likely to prevent customers from having to make claims after the damage has been incurred.  

Plan to Shift Portions of Portfolios

As the economy moves towards long-term decarbonization, insurers should evaluate how they are allocating investments. Portfolios that are heavy on carbon-intensive investments may undergo rapid asset repricing and volatility as decarbonization progresses. Consider the environmental impact of investments, and plan to shift significant portions of portfolios toward supporting a sustainable, decarbonized economy to limit climate risk.