Catalyzing a key business sector - the insurance industry - on climate change
Tackling climate change isn't just about engaging policymakers on the importance of enacting carbon-reducing policies. It also means engaging with key business sectors that will be directly impacted by growing climate risks and are well positioned to accelerate solutions.
Nine years ago, Ceres identified the colossal insurance industry as a key target for climate action. As the only NGO engaging with the industry on climate risk, we have mobilized leading insurance companies to move more aggressively on climate change. While key segments of the industry are making significant progress, it has not been at the pace and the scale needed – a conclusion made clear by the results of a new Ceres report benchmarking 330 insurance companies on their climate strategies.
Insurance companies are on the front line of climate risks. A warming world means more extreme weather events, from floods to droughts to intense coastal storms. And that means bigger losses for property and casualty (P&C) insurers, which often pick up the tab for loss damages that businesses and homeowners incur.
Ceres’ engagement with the industry was jump-started in August 2005 when, by sheer coincidence, we released a report about the growing financial risks that climate change poses to insurers’ bottom lines just as Hurricane Katrina slammed New Orleans and the Gulf Coast. The calamity ultimately cost private insurers a record $43 billion.
In the wake of the report, state insurance regulators and their umbrella group, the National Association of Insurance Commissioners (NAIC), began pressing insurance companies far better disclosure on climate risks and strategies for dealing with them. Thanks in large part to Ceres’ efforts, insurance regulators in California, New York and Washington began requiring climate risk disclosure by insurers operating in their states in 2011.
"We are asking insurers to share their views of the risk of climate change so that we can be sure that the industry and regulators are adequately prepared," Robert Easton, a lead insurance regulator in New York, told the New York Times when the disclosure requirement was first announced.
With eight critical states now mandating such disclosure – and since most insurers conduct business in one or more of these states – virtually the entire U.S. insurance industry is required to disclose their climate risk strategies.
And, as often happens, more analysis and disclosure by the industry is leading to stronger on-the-ground practice in managing climate risks. We’re seeing this especially from the large P&C insurers and reinsurance firms.
Nearly half of the 193 P&C insurers we evaluated in our new benchmarking report, for example, are taking positive steps when it comes to climate change modeling, including broader use of climate-informed catastrophe models that can inform their underwriting practices. Nearly a third of the P&C firms are integrating climate risks into their enterprise risk management, including products and services and investment practices. Some have gone so far as to include climate-related claims in quarterly reporting, and use a carbon shadow price in evaluating possible investments in carbon-intensive industries.
We've also focused significant attention on climate-related business opportunities for insurers. In a 2006 report, we highlighted dozens of climate-related insurance offerings that hold strong promise for growth, including 'green' building credits, renewable energy insurance and 'pay-as-you-drive' insurance. While these markets have not grown as rapidly as we would like, more insurers are earning significant revenues from these products. Take Allianz, for example, which has developed more than 150 green insurance solutions across all of its business segments globally, generating $1.4 billion in annual revenues.
We’ve also focused major attention on climate-sensitive investing, a hugely important issue given that insurance companies – especially life and annuity insurers – manage investment portfolios worth trillions of dollars.
In addition to incorporating climate risks into their investment decision-making, we’re also pushing insurers to seize growing clean energy investing opportunities, whether through direct ownership in wind and solar energy projects or through fixed-income bond instruments, such as green bonds, that can help finance such projects. We’re especially focused on the fast-growing green bond market – a market that is approaching $40 billion of issuances this year alone – and have held webinars for dozens of insurers on this issue in just the past few months. We’ve also seen significant new green bond commitments from insurers, including Zurich, which recently bumped up its green bond commitment to $2 billion.
While all of these examples show the enormous progress we have made, broader, more comprehensive action from across the entire insurance industry is desperately needed. Just as the insurance sector came together on smoke detectors for buildings and seatbelts for cars, it needs to come together today in accelerating global responses to climate change.