Due to its form of business, the insurance sector is especially sensitive to the risks posed by climate change and is a major player in the fight against it. The industry has long identified climate change as an emerging risk and an increase in temperature of more than 2°C could lead to a lack of affordable insurance.
Insurance Europe and over 2 000 signatories to its target two degrees campaign supports limiting a rise in global temperatures to less than 2°C, and it is pleased with the positive outcome of the negotiations at the Paris COP21 climate change summit in December 2015.
To see examples of how insurers are tackling climate change, click on a word below:
- In several countries, insurance coverage for natural hazards is difficult to provide because of the potential size of the risk and the limited pool of policyholders. Active public-private partnerships can help to ensure that the conditions of insurability are met or improved, thus allowing cover to be provided at a reasonable price.
- In the Netherlands, the Dutch Association of Insurers (VVN) has worked hard to make flood risks generally insurable. After the Dutch government withdrew from a public-private partnership aimed at providing flood insurance, the insurance sector developed a private flood insurance solution.
That solution provides limited, basic cover for all material damage to contents and buildings, which can be extended to other disasters (such as earthquakes) to strengthen the general support for the scheme. Reinsurance cover will provided by the Dutch Reinsurance Company for Flood Damage (NHO), set up solely for this purpose.
- The insurance industry plays an important role in raising risk awareness, based on the expertise it has gained through extensive research and long experience. Insurers also contribute to awareness-raising via their underwriting policies (eg risk-based insurance premiums, excesses or deductibles, required prevention measures, terms and conditions).
- When individuals and companies finance solutions themselves, they are more aware of the risks and financial consequences they face. This encourages them to limit their exposure by taking preventive measures and helps mitigate the human, economic and financial costs resulting from a disaster.
- Awareness raising campaigns are currently conducted in seven German federal states. These natural risk awareness campaigns are undertaken thanks to cooperation between the federal states, consumer protection organisations, the German insurance industry and architects, among others.
These institutions share a common goal: to raise awareness about the effects of climate change, natural hazards, loss prevention, best practices for natural catastrophe-resilient buildings or insurance.
- The insurance industry supports land-use planning and the raising of risk awareness by developing improved risk-mapping and zoning tools. In several countries, the (re)insurance industry has already developed or disseminated risk and hazard maps and zoning tools, sometimes together with the public authorities.
- The German insurance sector has developed the Kompass Naturgefahren online tool. Four federal states have contributed so far with data for a public graphic information system on natural catastrophe hazards. With one mouse click, every citizen can check the degree to which their home is endangered by floods, lightning, earthquake or storms. It is quick and easy to understand, it provides the information for exact addresses free of charge and it does not require registration.
- The HORA (Natural Hazard Overview and Risk Assessment Austria) digital risk map is a joint project between the Austrian Ministry of Agriculture and the Austrian Association of Insurers (VVO). HORA allows the general public to identify whether their property is at risk by entering their address. At www.hora.gv.at everyone can file internet enquiries, click through to the digital risk map and, using different zoom resolutions, see if their property or plot of land is at risk.
- Nordic insurers have developed VisAdapt, a tool designed to guide homeowners on how to decrease the risk of weather-related events affecting their houses.
- The Norwegian Natural Perils Pools has developed ClimRes, a map-based online interface to the data on insurance compensation payments. It provides three modes: a straightforward map display; an interactive dashboard; and a participatory tool where users can be actively engaged in a debate on factors that make a place more resilient.
- The insurance industry plays a key role in informing policymakers by speaking out on issues of common interest and participating in debates on policy issues. It is vital to promote risk awareness — particularly in some countries — and to better inform citizens about the measures they themselves can take to mitigate against and adapt to climate change.
- Insurance Sweden (Svensk Försäkring) recently published a report on how homeowners can protect their houses from damage resulting from backflow in the sewage system.
- The Federation of Finnish Financial Services (Finansialan Keskusliitto) has a joint flood insurance data-sharing initiative with the Finnish Environment Institute.
- The insurance industry is one of the largest institutional investors, and insurance investment in low and no-carbon technologies is becoming more common.
- Members of the Association of British Insurers (ABI) provide their investment teams with responsible investment policies, which use research and analysis across investment portfolios, including work on stranded assets, the economic impact of climate change, the factoring of environmental risks into bond prices and the energy performance of property investments. British insurers are also increasingly taking opportunities for innovation in investment and they have a growing interest in green bonds.
- The German move towards greater use of sources of renewable energy is currently one of the most important economic and technical projects in Germany. Insurers facilitate the expansion of renewable energies by providing their expertise and innovative financial solutions. Furthermore, insurers not only support the energy transition as risk-bearers but — provided the framework conditions are suitable — also as investors in energy parks and infrastructure projects.
Through investment in renewable energies, predictable income can be earned through quantifiable sales volumes and minimum price guarantees. Insurers can thus provide part of the capital needed to transform the energy supply and the expansion of energy grids. More information on the German insurance industry’s views on this energy transition can be found here.
- The insurance industry develops risk-based terms and conditions and provides advice to consumers on how to adapt to climate change. Insurers also use underwriting to motivate policyholders to invest in adaptation and prevention measures or green/energy-efficient alternatives.
- Members of the Association of British Insurers (ABI) have taken action to ensure that customers are informed about climate risk, providing support and information tools, encouraging climate change adaptation and a reduction in customer greenhouse-gas emissions through insurance products and premiums where possible, and seeking to increase their number of sustainable claims.
- Examples include emails and microsites offering practical guidance to customers, text and radio alerts warning of extreme weather events, and motor insurance initiatives offering bikes as an alternative to rental cars.
- Adaptation measures are crucial for increasing sustainability. However, these measures cannot be promoted by the insurance industry alone, as the insurer’s role is geared towards risk financing and risk management. Public authorities need to encourage a societal move towards more preventive behaviour and promote adaptation measures, eg by regulating housing zoning or developing flood defences.
- Public authorities should also maintain a dialogue with insurers, who can provide specialised knowledge through productive partnerships. Insurers help policymakers identify the appropriate areas in which public-private cooperation can be beneficial by providing research, encouraging prevention measures, delivering financial solutions and applying their expertise to track trends and define problems posed by climate change.
- The German insurance industry maintains an active dialogue with politicians. It contributed to the efforts of the joint federal government and state Working Group on Water (Bund/Länder-Arbeitsgemeinschaft Wasser (LAWA)) to find ways to increase natural catastrophe insurance penetration.
- Devastating natural disasters in 2010 prompted France to better coordinate and monitor its disaster risk reduction (DRR) policies. Its National Observatory for Natural Risks (ONRN) is a nationwide, risk data sharing, public-private platform to improve participative governance of DRR in France.
It was initiated by the French insurance industry - Fédération française des sociétés d'assurances (FFSA) and Groupement des entreprises mutuelles d'assurance (GEMA) - which still plays a major role through its dedicated association Mission Risques Naturels and its reinsurance partner, the Caisse Centrale de Réassurance (CCR).
- Public-private partnerships, where national administrations work together not only with insurers but also with other private sectors, are fundamental to meeting the goal of adapting to climate change. In recent years, public authorities and the insurance sector have come together to fight the effects of climate change and encourage a societal move towards more preventive behaviour.
- The Finnish insurance sector constantly cooperates with the authorities. The Federation of Finnish Financial Services (Finansialan Keskusliitto) has a representative at the national Flood Centre and in a flood risk coordination working group within the Ministry of Agriculture and Forestry. Finnish insurers also take part in the national programme for the mitigation of natural disasters, which is coordinated by the Finnish Ministry of the Interior.
- The German Insurance Association (GDV) has conducted a climate change project in cooperation with leading climate scientists. The project aimed to link the weather-driven losses of the past decades with various climate models to gain, for the first time, concrete future loss scenarios.
Through this project, the German insurance industry has gained a unique insight into the future, which has resulted in a report on challenges with answers from the German insurance sector. The Climate Change Challenge can be accessed here.
- The Federation of Finnish Financial Services (Finanssialan Keskusliitto), alongside the Finnish Motor Insurers’ Centre and Transport Safety Agency, has signed a commitment to sustainable development.
Furthermore, they have developed a new digital vehicle registration system, which enables the simultaneous registration and insuring of vehicles and significantly reduces the carbon footprint of registration.
- Prevention is the cornerstone of any insurance scheme. It is embedded in the practices of the private insurance sector, which has gained much expertise in this area over the years. This is especially true for extreme weather-related disasters which, without any prevention measures in place, would be very difficult to insure.
- Public authorities need to encourage a move towards more preventive behaviour and to introduce mandatory measures such as land-use planning for citizens and businesses that might otherwise consider the required investment too costly.
- UK insurers carry out a range of activities to support national and regional forecasting of future weather and catastrophe patterns. They use these outputs to inform their business practices, including pricing decisions and risk-based capital assessments. The UK insurance sector also uses such modelling in its dialogue with policymakers, and has lobbied for robust action on climate change from the government.
- The Norwegian insurance sector and the Norwegian authorities cooperated on a public-private pilot project on how insurance disaster loss data can help municipalities in risk-assessment planning.
The aim was to assess whether having access to the local damage data from the insurance companies could strengthen municipalities’ capacity to prevent future climate-related natural hazards.
The project recommends that municipalities and government authorities work together to enable municipalities to have access to insurance loss data on a more permanent basis.
- In Germany, ZÜRS Geo (Zonierungssystem für Überschwemmungsrisiko und Einschätzung von Umweltrisiken) provides an online risk assessment tool for the insurance industry to assess flood risk and offer risk-related premiums.
This zoning system for flood, backwater and heavy rain is a geographic information system that German insurers use to calculate flood risk as accurately as possible. In 2008 ZÜRS Geo was awarded the international prize for geographic information systems — the ESRI award — from the Environmental Systems Research Institute.
- In Mexico there are regulatory modelling tools used to estimate probable maximum loss (PML) and premiums as a way for insurers to achieve reserve sufficiency and meet capital requirements. These models are defined to work for:
- Agriculture: Mexico is divided into zones and, depending on the crop, thousands of climate simulations are run on each company’s insurance policy to estimate growth for each crop.
- Hydro-meteorological perils: several hurricane and climate patterns simulations are run on insurance policies by zone to estimate flood risks and wind damage.
- The Portuguese Association of Insurers (APS) and the Foundation of the Faculty of Science of the University of Lisbon have developed a project called Maps of Floods and Risk in Climate Change Scenarios (CIRAC). This project is set to be the point of reference for the flood risk analysis in mainland Portugal. More information can be found here and here.
- Norwegian insurers and the national authorities cooperated on a flood damage survey after major floods in Norway in 2013. The final report outlined the benefits for flood risk management of including flood parameters in future damage surveys.
- In France, the National Strategy for Flood Risk Management (SNGRI) takes a holistic approach to the implementation of the Flood Risk Directive, focusing on its objectives, the role of the different stakeholders and the priorities in allocating financing resources for action.
- Several insurers have developed apps to inform consumers of extreme weather events or if their properties are under potential risk from such events.
- The Austrian Association of Insurers (VVO) has developed the HORA app for flood warnings. It helps to determine while outdoors whether there is an impending risk of flooding or other natural hazards.
An important additional category that will soon be incorporated is a presentation of current weather data on floods, such as current water levels of more than 250 gauges, earthquakes, storms, hail, lightning and snow.
- To educate the public and industry alike about the increased risk of natural catastrophes posed by climate change, Swiss Re released its Flood Risk App in August 2012. The app gives a general understanding of flood risks and explains how to manage and insure them.
It also explores different types of flooding and the challenges involved in making them insurable. It highlights the importance of adapting to climate change and shows how reliable flood information can strengthen flood preparedness.
- British insurers disclose their greenhouse-gas emissions, typically according to the guidelines of the UK Department for Environment, Food and Rural Affairs or the global Greenhouse Gas Protocol.
- The enterprise risk management and catastrophe teams of US insurer W.R. Berkley investigate the possibility of “model miss” within vendor catastrophe models: this includes a comparison of modelled industry losses against revalued historic losses, investigation of individual subcomponents within the model and “stress testing” of model frequency and severity assumptions.
- Like most European insurers, Finnish insurance companies have developed a comprehensive natural disaster cover for household insurance.
- Insurance Sweden (Svensk Försäkring) recently published a document ranking the climate adaptation measures of the municipalities in Sweden, based on the European Commission’s climate adaptation platform tool. It intends to follow up on municipalities’ future progress on adaptation.
- The (re)insurance industry has been accumulating and sharing expertise on climate risks for many years. Assessing and managing these risks is part of its core business. Insurers share their expertise with the public authorities, which have the means to implement the required prevention and adaptation measures.
- In 2007, US insurer The Hartford created an Environment Committee as part of its public commitments on climate change. The Committee is made up of 17 business leaders across the group, including risk management, service operations, representatives of the group’s three main business lines (consumer markets, commercial markets and wealth management), its investment company, human resources, marketing and communications, and government affairs.
- The Risk Prediction Initiative (RPI2.0) was founded in 1995 by a group of Bermudian insurers and reinsurers and the Bermuda Institute of Ocean Science (BIOS). The RPI aims to be a centre of excellence in (re)insurance-relevant research in Bermuda. It seeks to expand its academic links, international network of world-class scientists, and industry members and associations.
- In 2014, SwissRe published a Sigma report on Natural catastrophes and man-made disasters in 2013: large losses from floods and hail; Haiyan hits the Philippines. The report stresses that, along with local prevention and mitigation measures, insurance is a powerful measure to strengthen resilience against catastrophe events.
The wide gap between economic and insured losses caused by natural disasters places a significant burden on the public sector and, ultimately, uninsured individuals and businesses. By pricing risk and thus incentivizsng investments in prevention measures, the reinsurance and insurance industries can help reduce the economic and social costs of catastrophes.
- In the autumn of 2015, the French Insurance Association (AFA, an association created jointly by FFSA and GEMA) will publish a study on the consequences of climate change on insurance systems, as well as a White Paper on prevention and protection policies against natural hazards.
- The German Insurance Association (GDV) has published a booklet on “Indicators for environmental and climate balances in insurance companies. A practical guide for the detection and optimization of environmental impact in insurance companies”.
The GDV’s aim is to enable companies to formulate ambitious environmental practices. The booklet showcases a number of options for targeted environmental management: from planning first steps to eventually reaching CO2 neutrality.
- As an over-arching project, Insurance Sweden (Svensk Försäkring) has developed an insurance industry strategy in order to reach a common view on how the industry can still provide adequate insurance cover despite the effects of climate change, as well as what society as a whole needs to do to prevent climate change-related damage.
- Members of the Association of British Insurers (ABI) take into account the environmental impact of their business. They screen potential suppliers against environmental criteria (including climate change), and prioritise suppliers that have established environmental policies and management systems.
For their own operations, common areas of work include increasing renewable energy use, carbon offsetting, energy and water efficiency measures, and recycling initiatives.
- In order to ascertain “best practices on climate work”, the Nordic insurance associations have made assessments of how far the Nordic insurance industry has come regarding awareness and participation in reducing environmental gases. The method is based on the same model as ClimateWise. Surveys were conducted to review developments in 2009 and 2013.
- Owing to their business model, risk-analysis is a core element of insurers’ expertise. This expertise proves useful in the analysis of potential harms from climate change related events.
- In the US, Munich Re Group adopts a multidisciplinary approach to climate change risks, using and combining the experience/expertise of scientists, specialist underwriters, lawyers, economists, and actuaries in a company-wide risk management process.
- In 2013, the Nordic insurance industry undertook a survey to view the development in climate awareness, knowledge and action among Nordic insurers following the production of a Nordic Best Practice guideline for insurers in 2009.
Its report showed the status of the insurance industry’s risk assessment and measures related to climate change. The aim was to bring social and environmental responsibility into focus and for the industry to set new and ambitious goals to tackle future challenges.
- In 2010, US insurer The Hartford launched The Hartford Renewable Energy Practice to insure the wind, solar and fuel-cell industries. This was done in recognition of the growing opportunities for insurers to offer products and services that help their commercial and individual policyholders move towards renewable energy and reduce their greenhouse emissions.
- Greenhouse gas
- The Nordic insurance associations have cooperated on assessing the climate impact of fire and water damage, which are the most common and costly types of damage to property. The damage is also costly in terms of the CO2emissions that are released.
Reducing such damage will therefore not only have an impact on costs and insurance premiums, it will also have an effect on climate change. This report on “CO2Emissions associated with the management of water and fire damage in the Nordic countries” estimates the CO2emissions of different types of property damage in the Nordic countries.
- The American Insurance Group (AIG) in the US has noted that climate-related developments may affect 1) reputational risk (ie the potential impact of any negative perceptions of the public, suppliers or customers of AIG’s carbon performance) and 2) societal or consumer behaviour (ie climate change-induced changes in customer preferences for products and services).
- Bermudian insurer Aspen is heavily invested in research initiatives on natural hazards and climate. These include not only an in-house research and development team established in 2008 but also support for the Risk Prediction Initiative (RPI) in Bermuda and the US Institute for Business and Home Safety (IBHS).
In-house research includes the consideration of climate change and climate variability in catastrophe modelling, eg by developing Aspen’s own medium term rates for the hurricane model created by catastrophe risk modeller RMS for the Atlantic basin.
- In Switzerland, an open-source economics of climate adaptation assessment model called Climada has been developed. Climada uses state-of-the-art probabilistic modelling to estimate the expected economic damage, the incremental increase from economic growth and the further incremental increase of damage resulting from climate change.
The economics of climate adaptation methodology, as implemented in Climada, provides decision-makers with a fact base for understanding the impact of climate on their economies and for identifying actions to minimise that impact at the lowest cost to society, allowing them to manage total climate risk.
- In March 2015, the Association of British Insurers (ABI) held a climate change conference, at which it launched a letter signed by the ABI, Axa, Aviva, ClimateWise, Friends of the Earth and others calling for measurable and time-bound agreements to be made at the COP21 Paris Climate Conference in December 2015, supported by a strong legal framework.
- In 2011, Swiss Re published Closing the financial gap: New partnerships between the public and private sectors to finance disaster risks. The report focuses on new forms of public-private partnerships, which can help countries absorb the financial consequences of catastrophic events and make them more resilient.
- In the US, German insurer Allianz offers its retail and commercial customers a growing range of green products and services, supporting a low-carbon economy, protecting the environment and helping clients prepare for the negative effects of climate change and/or mitigate the associated risks.
- In 2010, the Slovenian Insurance Association (SZZ) published a brochure on the natural catastrophes that occurred in 2008 and 2009, which were the most catastrophic years recorded by Slovenian insurance companies in recent decades. The brochure also gives a review of natural catastrophe (nat cat) insurance in Slovenia and available natcat cover.
- The German Insurance Association (GDV) has organised several high-level conferences on natural catastrophes. For example, its June 2014 event attracted prominent experts from politics, consumer protection and the water and insurance industries to take stock of the most recent flood events in Germany. In close cooperation, all the stakeholders discussed how the population can be protected and secured against future disasters.
- The American International Group (AIG) was the first US-based company to adopt a public statement on the environment and climate change, recognising the scientific consensus that climate change is a reality and is in large part the result of human activities that have led to increasing concentrations of greenhouse gases in the earth’s atmosphere.
Climate change is seen as a serious global environmental problem with risks to the world economy and ecology, and to human health and wellbeing, and AIG supports market-based environmental policies to address the problem.
- In Austria, work is currently being undertaken in order to establish a national certificate for buildings. In addition to their geographical risk location, this certificate will provide information on how the means of construction provides resilience against natural perils such as hail, storm, floods, landslides, etc. In its final version, this certificate will have a similar function to the existing energy performance certificates for buildings.
- COP21 is a crucial event: world leaders need to reach an ambitious international agreement, applicable to all countries, which will limit global warming to 2°C.
- European insurers and reinsurers are exposed to the impact of weather and climate-related risks and have long identified climate change as an emerging risk. An increase in temperature of more than 2°C could threaten the sustainability of insurance.
- The European insurance and reinsurance industry is fully committed to contributing to the fight against climate change and to the success of COP21 through mitigation or adaptation.
- To sustain the affordability and availability of insurance in the face of climate change, public authorities must prioritise and encourage widespread implementation of prevention measures, both at municipal and individual level. Examples of these measures include:
- building codes to enforce climate-resilient materials in newly constructed buildings;
tax incentives to promote private investment in climate-proofing infrastructure projects;
- proper maintenance and reinforcement of structural barriers against floods, particularly in high-risk areas; and
- renovation of old or poorly maintained urban sewage and drainage systems to prevent overflow during heavy rainstorms.
- Adaptation efforts must be flexible enough to accommodate future, long-term climatic situations posed by the expected rise of extreme weather conditions and the increasing frequency of events. With this in mind, governments should adopt national adaptation strategies that target the specific natural catastrophe risk exposures of their jurisdictions.
- National policies for building and zoning plans must also be given priority in order to stop development in high-risk areas or to otherwise offer the public in these areas more appropriate protection against natural catastrophes. The absence of a proper planning policy is a primary factor in weakening the effectiveness of natural catastrophe insurance schemes.
Insurers are not only changing their practices in order to reduce their emission of greenhouse gases, they also contribute to mitigate the effects of climate change in many other ways. For example, by developing products that incentivise policyholders to also reduce their carbon footprint or by investing in renewable energies.
It is just as important and urgent to reduce our carbon footprint as it is to adapt to the inevitable consequences of climate change. Insurers have repeatedly stressed that, in order to enhance the affordability and availability of insurance in the face of climate change, public authorities must also prioritise the implementation of adaptation and prevention measures, for example through climate-resilient building and zoning plans. Furthermore, national governments must address the expected increase in weather-related disasters through national adaptation strategies that target the specific natural catastrophe risks of their countries.