Insurers need to act on climate risk, says report

The insurance industry could become unsustainable as a result of not taking enough action to spread awareness of climate risk or engage government and policymakers on the issue.

That is according to the latest report from the Chartered Insurance Institute (CII), which concludes that in order to survive, insurers will have to withdraw cover as large swathes of the population, including many people across the developed world, become uninsurable.

The environmental impact of energy consumption and its effect on the insurance and financial services sectors is unveiled in the latest “Future Risk” report, the third in a series of special reports marking the CII centenary year as a Chartered professional body.

Entitled “Climate change and energy security – global challenges and the implications”, the report sets out three potential future scenarios based on the insights of five world leading experts in specially-commissioned essays.

Using the arguments put forward by these experts, the report outlines three possible scenarios, each offering very different visions of the future and a sliding scale of risk for financial services and society as a whole.

In the Upside Scenario, the world sufficiently shifts to renewable energy sources to minimise global warming and governments develop sophisticated infrastructure and warning systems allowing them to adapt to any remaining climate risk. Insurers are able to support this by providing economic incentives for the development of appropriate infrastructure and by playing a leading role in influencing government policy and raising general awareness of climate risk.

The Central Scenario sees limited efforts to adopt sustainable technology and renewable energy and countries only take sporadic efforts to adapt to climate change. There will be isolated instances of insurance market failure where some insurers withdraw cover for certain individuals and firms and occasional insolvencies stemming from catastrophic weather events.

In the final Downside Scenario, little or no effort is made to switch from fossil fuels and irreversible tipping points in the earth’s climate are breached making adaptation essential but costly. Equally little effort is made to adapt to such a severe natural environment.

CCI policy and research co-ordinator Ben Franklin said: “While historical analysis and ‘future gazing’ is by no means definitive, our three scenarios should help insurance and financial services professionals prepare for some of the challenges they may face as the global climate continues to change.

“There is clearly an important role for insurers to play in securing the wellbeing of the industry and the customers it serves. Engaging with government to influence policy making, developing new products and pricing strategies to incentivise better adaptation and providing counsel to other professionals such as architects and civil engineers will be crucial to achieving this aim.”