Can Insurance Companies Combat Climate Change?

Can Insurance Companies Combat Climate Change?

May 30, 2024

Short answer: YES! Insurance companies have a unique role in the economy that they can leverage to drive positive environmental impact. At its core insurance is about the safeguarding of society, so understanding and mitigating climate change should be a primary focus for the industry. 

Climate Change and its Impact on Insurance

The past ten years alone have seen a notable change in climate activity and insurers need to understand the rapidly changing landscape.

Increased Frequency and Severity of Claims

Natural events and disasters have picked up the pace due to global warming and it shows through increased claims and costs to insurers. According to the National Oceanic and Atmospheric Administration (NOAA), the United States experienced twenty-two weather and climate disasters in 2020 alone, each causing at least $1 billion in damages. This was nearly double the previous record of fourteen events, highlighting a growing trend in weather-related catastrophes (Climate.gov). These disasters have a direct impact on insurance companies through higher claims and costs which in turn affect stability and profitability. These rising costs have made companies reevaluate their risk models and require more robust financial reserves.

Rising Premiums and Policy Adjustments

As a result of these increased risks, insurance premiums have been rising steadily. Homeowner policy premiums rose by 12.1% across the U.S. from 2021 to 2022, with even higher increases in states frequently hit by natural disasters like Arkansas, Washington, and Colorado​ (State of the Planet)​. Additionally, insurance companies are raising deductibles or establishing higher deductibles for natural disasters in high-risk areas and, in some cases, refusing to renew policies altogether​.

Market Instability and Regulatory Changes

The increasing risk and cost have led to market instability in the insurance market, particularly in California and Florida. Due to the devastating wildfires of 2017-2018, California saw a significant increase in non-renewals of home insurance policies (State of the Planet)​. In Florida, the value of properties at risk from storm surges is enormous, and the expected increase in flood insurance premiums could render coverage unaffordable for many residents​ (McKinsey & Company)​. Regulators are also focusing on the financial health of insurance companies to ensure they can withstand the increasing frequency of claims. Stress tests and solvency assessments are becoming more rigorous, and there is a push for greater transparency in how insurers are managing climate-related risks.

What Insurance Companies Can Do to Make a Difference

Understanding how insurance is changing due to climate change is only the first step. Insurance companies have many unique opportunities to respond to and mitigate the ongoing crisis.

Integrating Climate Risk into Underwriting

Starting internally with insurance products is a simple first step for companies. Insurers can encourage more sustainable practices among their policyholders. For example, offering lower premiums for buildings with green certifications or for companies with robust climate action plans incentivizes environmentally responsible behavior​​​.

Supporting Sustainable Practices and Technologies

By aligning their investment portfolios with climate goals, insurers can help drive the market toward greener practices. This includes financing renewable energy projects, supporting the development of electric vehicles, and investing in companies that prioritize sustainability (Reuters)​. Other examples include funding solar and wind power, and supporting infrastructure improvements that reduce the risk of floods, fires, and other climate impacts. 

Educating Policyholders 

The insurance industry is woven into public life and companies can have a considerable influence on providing information and education to policyholders. Insurers can offer guidance on how to reduce carbon footprints, improve energy efficiency, and implement climate adaptation measures. Educating the public about the risks of climate change and the steps that can be taken to mitigate these risks can lead to broader societal changes​ (State of the Planet)​.

 Looking Ahead

The insurance industry needs to understand that it is under pressure from investors, regulators, and society to respond proactively to climate risk​​. Insurers have exclusive opportunities to make a substantial impact, and this sector's future resilience relies on its ability to understand and mitigate the increasing effects of climate change.