The insurance industry continues to bear the brunt of climate change and other sustainability-related risks. According to Aon’s 2021 Weather, Climate and Catastrophe Insight, it is estimated that the losses associated with climate aggravated catastrophes reached $130 billion in 2021 and has being growing over the last couple of years.
Liability claims are also on the increase arising from proceedings for failures in mitigation and adaptation, greenwashing, disclosure, negligence and human rights issues.
On the other hand, the industry stands to gain from opportunities presented by sustainability and climate risks by developing products that enable customers adapt to and mitigate these risks.
The industry also stands to be one the biggest beneficiaries in a sustainable world. A society free of disease, hunger and other ills means more disposable incomes, leading to increased uptake of insurance and lower claim losses.
The industry should, therefore, have all the motivation of being at the forefront in mitigation of and adaption to climate and sustainability risks. Unfortunately, for a long time the insurer has more often than not come to pick up losses after the loss event has crystallised.
Not much progress has been made in mitigation of and adaption and adaptation of risks. Insurers would ordinarily re-price risks upon renewal to cover increased losses.
This approach may not work for climate risks as their effects can be systemic, likely cause market failures that can threaten business models and make insuring some risks uneconomical for insurers and unaffordable for customers.
While considerable progress has been made globally since the launch of the UNEP-FI Principles of Sustainable Insurance in 2012, not much progress has been made among local insurers with only a handful talking about sustainability let alone integrating into strategy and operations.
What can the insurance industry do to drive sustainability and mitigate the effects climate change? One might be tempted to argue that the industry’s contribution to climate change is negligible when compared to entities in manufacturing and the fossil fuel-intensive sectors.
While this may be true to the extent of the industry’s immediate boundaries, looking at the wider boundary, the industry can contribute to mitigating climate and sustainability risks by driving behaviour change among its customers and stakeholders.
This can be achieved by including environmental, social and governance (ESG) criteria in product development, underwriting and claims process.
The industry can also drive sustainability by in developing products that help in adaptation and mitigation of climate risks, as well as products that promote economic, environmental and social sustainability.
One sector that is in dire need of support from the industry is agriculture that has suffered losses from climate change. Unfortunately, the insurance industry has not fully embraced agriculture insurance due to its perceived unprofitability.
Regulators across the globe are increasingly focusing on sustainability and climate risks by integrating risks into the macro and micro prudential guidelines.
