Climate change, a much discussed topic over the last few years, has a significant potential impact on the insurance industry. Insurers are key in helping policyholders recover from increasingly frequent and severe weather events but recently it has been noted that climate change affects insurers on “both sides of their balance sheets”.
Extreme weather events are evident around the world. Recently the severe winter weather in the United States will see insurers paying out more than US$1bn in losses. The most recent fires in and around Cape Town, owing to human negligence but exacerbated by factors such as changing weather patterns, will have large impacts on the short-term insurance industry in South Africa and other natural catastrophes such as the cyclones in Australia and flooding in Indonesia will see millions of dollars worth of claims for insured losses being paid out. An article in the Insurance Journal describes that the insurance industry is aware of the large potential losses relating to extreme weather events and natural catastrophes and is “taking steps to stay ahead of the climate curve”. In general, the industry has learned to better model for catastrophes and as a result we have seen almost no insurance companies declaring insolvency in recent years due to one large catastrophe. It is important that insurers do not become cavalier about climate change risk, however, and that they actively work towards further mitigating related risks.
Climate change not only impacts insurers on the liability side, however. An article in The Guardian highlights the fact that insurers with investments in fossil fuels (a growing financial market is recent decades) and related technologies may take a huge hit as regulation sees that fossil fuel emissions are reduced and the world shifts to the use of more renewable energy sources. As long-term investors, it is important that the insurance industry take steps to identify ways to manage this investment risk. On the other side of the spectrum, perhaps investing in “green bonds” could be a way for insurance companies to mitigate climate change risk in a sustainable and responsible way.