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Climate Change and Insurers: A much desired paradigm shift!

Mar 24, 2020

Translation in simplified Chinese courtesy InsConsulting Team:

Climate Change and Insurers: A much desired paradigm shift!

While insurers tend to be linear in their thinking and action – there is an element of circularity between insurance and climate change. COVID 2019 is for sure one such bender but then there is a lot more that comes in the way of the rounding! This is something embedded deep down in insurers’ DNA. Not only an element of ‘remote’ ought to counter the obsession with proximate, so does the singleminded pursuit of predictability with unpredictability. Let us look at some of the challenges that tend to act as the blind spots.

Climate change is a cross class financial risk: Ecological disturbances such as urbanisation and deforestation together with rising temperatures as well as sea level rise are forcing wild animals closer to domestic animals and humans. Thereby exposing us to novel diseases. It is estimated that in the last few decades 60% of all recognised human diseases and 75% of emerging infectious diseases were zoonoses or transmitted from animals to humans. Corona virus is neither the beginning nor the end of it. Health and life insurers get directly impacted apart from the supply chain implications. We are also witnessing customers scrambling for coverage against Business Interruption losses emanating from cancellations and restrictions to pre-empt a Covid-2019 breakout.

By 2100, it is projected that, stress from extreme heat and humidity will annually impact areas which are home to about 1.2 billion people worldwide (according to Rutgers University-New Brunswick, USA). This may damage the brain and other vital organs. Another big threat for both life and health insurers.

While some climate deniers disagree with the fact that the intensity of bushfires in California and Australia were a result of climate change. Likewise, burning rainforests in the Amazon delta and elsewhere will have adverse implications for global climate. What does this have to do with insurance? Well, some assets in vulnerable locations prone to high frequency and high severity losses are being ‘redlined’ by insurers. Thereby attracting higher pricing and deductibles. And in some instance rendering uninsurable, as well. The full thrust of climate change on the insurance industry tends to get camouflaged under the guise of Natural Catastrophe or Act of God.

While the science of Climate Change is well established, regulators and activists have begun to challenge insurers on their investments in the fossil fuel industry. Insurers not only underwrite risks including the non -renewable energy segment which has precipitated the climate crisis – they are risk managers and particularly the ones in North America are big investors in the fossil fuel industry.

Pollution globally kills approximately 7 million people each year. If you continue insuring polluting industries and invest in them – you are truly between the devil and the deep blue sea. Any drop in the auto sales makes insurers gloomy. Perhaps they miss out on the fact that this could be good news to their health portfolio. It’s been more than 25 years since California sued top auto manufacturers for causing Greenhouse Gas (GHG) effect. Needless, therefore, to mention the recognition of the linkage between pollution and climate change.

What till recently also sounded remote was management liability. Not only fossil fuel companies are expected to face growing class actions from a range of stakeholders, Norwegian Cruise lines is faced with a D&O lawsuit. The first such arising from Covid 2019. Dismissing this as a Black Swan event would be rather naïve. Infact the repeated strong signals of an imminent global killer pandemic breakout over the years was missed out in all the noise. The buck, therefore, ends up with the boards of responsible businesses.
The current risk management practices of insurers tend to be myopic. To deftly deal with Climate Change calls for both a wider time frame and imagination. Risk modeling based on a couple of centuries historical data – of a 4 billion-year-old Planet – is too miniscule for it to be predictive. Lastly, it needs to be accepted that the effect of some of the things insurers insure and invest in results in Climate Change. Howsoever seemingly remote a cause Climate Change might seem; it is increasingly turning out to be proximate to loss triggers. The starting point for insurers to cope with Climate Change calls for shedding the linearity.

Praveen Gupta

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