The winds – and floods and wildfires of climate change

FOR those in the insurance industry, the recent EIOPA paper on climate change in non-life insurance has meant that our thoughts are now focused on the direct and indirect impacts of our planet’s changing climate and how these can be addressed.

It does not need to be said that insurance companies have a vital role to play, not only in working towards a net-zero future, but also in aiding recovery for households and businesses that are impacted by NatCat events. Worldwide, the insurance sector, with its NatCat expertise and diversification mechanism, can play a key role in reducing exposures, in raising risk awareness and in fostering adaptation.

Not only this, but the reconstruction phase that follows a significant natural disaster is very often – if not almost always, in the developed world – underpinned by insurance coverage, a huge positive for our industry, for which we do not give ourselves enough credit. And no doubt this immense societal contribution will continue.

The expected changes in climate will require adaptation of current underwriting and re-insurance practices. The insurance sector’s ability to continue to offer financial protection against the consequences of these events relies on its ability to understand the likely impact of climate change and adapt business strategy to account for it.

All property-related lines are expected by EIOPA to be impacted by physical climate change, risk and adaptation and mitigation measures will play a crucial role in reducing the risk levels in the future. Some insurers are also considering incentivising risk mitigation policies, apply higher deductibles/lower limits or policy restrictions, as well as raising policyholders’ awareness.

Nor can the potential indirect consequences of climate change be neglected. Raising premiums, changes in insurance conditions, in the form of higher deductibles, lower limits or exclusions, may lead to detrimental consequences for policyholders and even the insurance sector itself in the form of reputational risk.

This could have negative impact in terms of insurability and affordability from a societal point of view. EIOPA is also monitoring these trends. EIOPA’s paper indicates that much work still needs to be done to prepare and a note of caution must be sounded.

Climate change-related risks are long-term risks, for which a standardised methodology for assessment is not yet widely and fully developed by the industry. The complexity and uncertainty of time horizons and potential future developments make it difficult to precisely assess and quantify them. There is much still for the non-life insurance industry to absorb and work on with limited time left on the doomsday clock.