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Climate Change

Insurers are at the forefront of dealing with the impact climate change has on communities and infrastructure all over the world. They want, and need, to be part of the solution. The biggest thing the industry can do is to use its sizeable investment portfolios to move funding away from things that are polluting the planet and into greener initiatives. Current structures and regulation make that harder to do than it should be – so let’s fix them.” 

- Huw Evans

What’s the impact of climate change on insurance?

There are two ways in which climate change is a critical issue for the insurance industry.

  • An increased frequency and severity of major weather events means a higher number of more costly claims for insurers to deal with, globally as well as in the UK.
    • Hurricanes Florence and Michael which hit the US in the second half of 2018 are believed to have resulted in insured losses of more than $10billion1
    • The extreme freeze that hit the UK early in 2018 resulted in insurers paying a record amount for burst pipes - £194million in a three month period.
    • 2018’s extreme heatwave led to more than 10,000 households needing to claim for damage caused by subsidence, at a cost of more than £64million.
  • Insurers are responsible for investing billions of pounds of assets which need to grow to fund people’s retirements and to cover future claims.  
    • There is a risk that, if there is a disorderly transition to a low-carbon economy, the value of many of the assets in which insurers invest will fall with little warning.
    • However, this also presents opportunities for firms which transition to more sustainable assets at an early stage.
    • The UK’s insurers alone hold over £1.8trillion in invested assets. Currently, only around 1.2% of all assets under management in the UK are invested in Environmental, Social and Governance (ESG) assets such as renewable energy2.

What impact can the insurance industry have on climate change?

Insurers are closely involved with how the world is preparing itself for the impacts of climate change, but also want to do more.

Adaptation is work which helps society be as resilient as possible to the impacts of climate change. Interventions include flood defences, changes to how and where buildings are constructed and making sure insurance is used as part of a package of resilience measures.

Insurers contribute to the wider understanding of which measures can be most effective and help promote measures individuals and communities can use to increase their protection. The insurance industry in the UK worked with Government to design and implement Flood Re, a scheme designed to increase the availability of insurance to homes in flood risk areas.

Mitigation is work to try to reduce the extent to which climate change occurs, for example by reducing harmful emissions and “decarbonising” the economy. This means reducing the world’s reliance on fossil fuels, reducing emissions from homes and transport and developing clean and renewable energy systems instead.

Insurers already invest in sustainable initiatives such as windfarms and solar power, which are a good match with their long-term liabilities. However, there are currently obstacles to insurers investing a larger proportion of funds in sustainable assets which we have set out here. Notably, the low quality of ESG data in the financial system makes it difficult for institutional investors to measure and manage their exposure to climate risk, and the short time horizons of the current prudential regime act as a disincentive for insurers to invest in the kind of long-term, sustainable projects that could help mitigate the impacts of climate change.

ClimateWise

The ABI is a founding member of ClimateWise, a global insurance industry initiative established in 2007. Signatories to the initiative agree to annually report their progress against 6 principles', including how they are promoting climate awareness among customers and how they are reducing the environmental impact of their business. ClimateWise also undertakes research and develops tools for industry to use in their climate change management, most recently publishing frameworks to understand and manage both physical risk and transition risk .


 

  1. https://www.iii.org/fact-statistic/facts-statistics-hurricanes
  2. *Department for International Trade, “The UK – a natural home for green asset management” 

For further information on the climate focused work of the ABI and some our members, visit our archived case studies.