Insurance insiders sounded the alarm. Here’s what action can look like

This post was co-authored by Talley Burley and Sepp Haukebo, EDF

Recently, a group of senior insurance industry professionals from the UK and Europe anonymously published a memo that made global headlines. It warns that rising physical risks from climate change are leading insurers to increase the price of insurance and limit or even withdraw coverage, contributing to a growing global protection gap. These responses may be commercially logical for individual insurers, but they leave communities and businesses bearing the brunt of weather disasters, with consequences that ripple through the wider economy and ultimately back to insurers themselves. 
 
The insurance industry has made progress on climate, but the impacts continue to intensify. The warning is familiar. What makes this memo notable is the coordination among senior industry insiders to sound a public alarm.  
 
Insurers cannot make every risk or property insurable, but they can be a partner in mitigating climate risks and minimizing additional warming to protect people and businesses from future harm. The memo adds urgency to that agenda. The next step is action. Fortunately, there are multiple promising areas for insurance-related action advancing climate adaptation and mitigation, both through insurers’ own business decisions and in partnership with governments, investors, NGOs, academia, and others. 

Opportunities for insurance to mitigate risk by supporting adaptation and resilience 

Building resilience is good for communities, businesses and insurers’ bottom lines. Helping customers reduce their exposure and vulnerability to disasters can limit both the losses they suffer and the claims insurers pay. A recent EDF toolkit highlights how insurers, reinsurers and brokerages are already supporting adaptation and resilience through innovative products, corporate commitments, risk advisory, research partnerships and more. EDF engages with regulatory and policy processes that improve transparency around climate risk disclosure, facilitate investment in community adaptation and resilient infrastructure, and help make communities more insurable. We have also published in-depth research and recommendations for driving deeper resilience as extreme weather and climate impacts intensify:  

• Recognize nature-based risk reduction: Nature can help reduce loss and damage, and insurance can help protect nature. Drawing deeper linkages between nature and insurance, including better reflecting the value of nature in models and pricing, can benefit industry, governments, and communities. Insurance can also help to drive investment in nature-based solutions through better recognition of their value in underwriting and pricing. Read more on EDF’s recommendations. 

• Support climate-resilient rebuilding: Additional coverage within insurance policies, sometimes referred to as “riders” or “endorsements,” can enable homeowners and businesses to rebuild with upgrades that mitigate risk, reduce emissions and reduce policy costs. Successful models like those developed for IBHS FORTIFIED roofs can provide a model to expand efforts to additional hazards and risk reduction types. Read more. 

• Strengthen financial resilience for low-income households: New approaches and innovations to insurance can help ensure that disaster protection is affordable and accessible, and that individual and community investments in resilience are transparently reflected in insurance pricing. Read more about inclusive insurance, and learn about a pilot led by EDF and partners to leverage parametric insurance to support post-disaster financial gaps for low-income households in NYC. 

• Strengthen global agricultural resilience: Farmers are some of the most vulnerable to climate risk, with serious implications for global food security. Well-designed agricultural insurance policies and programs can support farmers in implementing climate-resilient practices, reducing risk and maintaining crop and livestock yields. Read more. 

• Support resilient fisheries and ocean communities: Three billion people rely on seafood as a vital source of protein, and hundreds of millions depend on the world’s oceans for their livelihoods. A growing number of insurance innovations support the health of ocean ecosystems such as coral reefs and mangroves, and the communities that depend on them. Read more.  

• Mitigate systemic financial risk: Banks and insurers are often exposed to risks affecting the same assets, but assess these risks differently: they use different information and time horizons, and do not account for each other’s actions. Cross-sector collaboration on climate risk assessment and products that reward resilience and adaptation financing can help strengthen both sectors and ensure the stability of the overall financial system against climate shocks. We explore this topic in a forthcoming report. Register here for our upcoming webinar where we’ll discuss the findings and recommendations. 

Opportunities for insurance to mitigate emissions 

While it is essential to support climate resilience and adaptation efforts, the most important way to reduce climate risk is to mitigate greenhouse gas emissions and address the cause of climate change rather than just the symptoms. Insurers have a vital role to play through both their underwriting decisions and their investment portfolios. 

• Implement net zero-aligned underwriting criteria: Chubb’s work with EDF on methane management, including sectoral resource hubs and underwriting criteria for oil & gas companies, demonstrates that insurers can use underwriting and client engagement to drive emissions mitigation. But broader and more ambitious efforts are needed. While many insurers restrict underwriting of new coal and tar sands projects, restrictions around high-emitting oil and gas projects generally remain limited. And, few insurers address emissions in non-fossil fuel sectors, such as agriculture, construction, manufacturing and transportation. 

• Develop insurance products for emerging clean technologies: Renewable energy and other transition technologies present growing business opportunities for the insurance industry. Insurance companies, reinsurers and brokerages have key roles to play in helping early-stage climate and cleantech companies manage risks and build confidence among lenders and investors who provide the financing that’s needed to scale.  

• Undertake sustainable investment strategies: Insurers own an estimated USD $42 trillion in assets globally, and regulatory scrutiny over their transition risks is increasing. The United Nations Environment Programme Forum for Insurance Transition (FIT), in which EDF plays a role as a civil society advisor, provides comprehensive guidance for how insurers can assess and address potential transition risks on the investments side of their balance sheet, alongside the underwriting side. 

From awareness to action 

The ominous climate memo by insurance industry insiders is neither the first nor the last of its kind. As the discourse continues about the insurance industry’s role in mitigating climate harms, it is critical to channel the energy toward concrete action by insurance companies, reinsurers and brokerages. Alongside other nonprofit partners, EDF is ready to help insurance companies take concrete action to scale up their support for adaptation and resilience, and accelerate their transition to net zero.