Insurers will Profit in a Low Carbon Emission World

Hurricanes, land slides, heavy storms, prolonged droughts and wild fires are heavy losses on global insurers and the laters realized the direct cost impact of climate change on their portfolios. According the HBR (Mindy S. Lubber); "many others are seizing the moment by developing new products and services that will reduce losses for both customers and themselves. Examples range from green building design and hurricane-resistant construction to weather derivatives such as drought insurance and wind insurance" Today the global insurance industry reached 5 Trillion USD.

Umair Irfan states: "In the United States this year left insurance companies that cover floods, fires, hail, and extreme cold on the hook for staggering losses. If current trends continue, they could suffer one of the costliest years in recent memory". Costliest year in recent memory...

Gerome Haegel, the group chief economist at Swiss Re stated: "Climate change is the No. 1 long-term risk out there. The insurance sector is part of solving the existential threat, the No. one long-term risk. There’s a lot we can do as an industry".

As we all know, every action has an equal reaction, and luckily the insurer's reactions are becoming more positive and contributory. According to Reuters: "In July 2021, eight of the world's leading insurance and reinsurance companies on Sunday launched an alliance to help speed up a transition to a net zero emissions economy. The companies, which include Europe's top three insurers by premiums - Allianz?, AXA,?and Generali?- said the Net-Zero Insurance Alliance (NZIA) would work to shift underwriting portfolios towards net-zero greenhouse gas emissions by 2050"

Neal Baumann Deloitte Global insurance industry leader states: “Through innovation to de-risk the transition and low carbon solutions, the insurance industry can play its part in creating the services and products demanded by the wider economy as it decarbonises. Driving this agenda forward will require new ways of thinking and an engaged approach, both across the industry value chain and outside”. Therefore it is recommended to create think tanks based on new ways of seeing things, to be creative and disruptive for the sake and in the service of nature. Deloitte also proposes 9 priorities that will assist in product innovation as follows:

Enabling and incentivising low carbon choices - Mainstreaming the encouragement of climate mitigation through efficient and resilient reinstatement - Implementing environmentally sustainable claims servicing - Enabling capital flows towards green solutions through risk transfer solutions - Creating removal-based carbon offsets through natural capital protection - Scaling emerging and existing low carbon and net-negative technologies and start-ups - Supporting the sustainable decommissioning of carbon-intensive assets - Developing risk advisory services to support clients’ climate mitigation understanding and approach as well as- Developing solutions for increasing climate legal liability and environmental litigation.

Furthermore, and relatively to the nine priorities, Deloitte's Neal Baumann continues, there are seven actions proposed as follows: Actively engage with government - up-skill to enhance an ‘engineering’ approach to underwriting - Coordinate across the insurance value-chain - Drive ‘long-termism’ - Enhance structuring of existing climate data and development of key climate models - Innovate product structures and new insurance offerings?as well as - Align insurance solutions with insurers commercial and climate objectives.

In conclusion, we have seen a direct and record high cost of climate change on insurers and the proposed priorities and action plans. As a rule of thumb, the more we contribute to net zero emission goals the less claims will incur, and the better underwriting results.

Roy Keyrouz - Insurance Blogger - CII Certified.