How Climate Change is impacting Insurance

As the economic impact of climate change will move economies towards de-carbonization, and carbon-neutral investments, climate risk is going to alter insurance policies, portfolios, and assets. The insurance industry must prepare for the physical, and systemic effects of climate change by adapting new business models.

Munich Re Report 2021

Reshaping the P&C Business Model

A shift in business model is required, away from transactional risk transfers and indemnity payments, towards scaling existing incentives. Stakeholders — such as customers, shareholders, and regulators, are therefore likely to demand that insurance solutions go beyond traditional risk transfer to explicitly address risk mitigation.

McKinsey: Climate change and P&C insurance: The threat and opportunity 2020

01 Asses climate risk through advanced data analytics

Insurers’ current models do not account for the growing number, types, and interconnectivity of risk. Concentration and aggregation of risk will likely increase, and spread across diverse coverage — flood, property, and business interruption.

02 Build resilience and rebalance portfolios

Although insurance companies fare better in understanding and measuring the impact of climate risk on their financial resilience, when compared with other sectors. Many institutions, from banks to asset managers, that have historically been less exposed, and therefore remained less sophisticated assessors of climate risk — have also begun to incorporate climate risk into their considerations of investment allocations, credit risk, and asset management.

03 Help organizations mitigate climate risk

Insurers should now also focus on mitigating and even preventing physical climate risk. This commitment requires shifting business models away from transactional risk transfers and indemnity payments, towards scaling existing incentives — such as rebates for using resilient construction materials etc.

04 Create innovative products to address climate risk

As partners, insurers might deploy new solutions to protect customers from new exposures, while leveraging market opportunities. Solutions could be as straightforward as parametric pricing, or insuring against events of a set magnitude, instead of the value of losses. Insurers can also play a role in matching risk-transfer solutions to alternative capital from investors with more risk appetite.

05 Revise investment strategies

Insurers must re-evaluate their investment allocations as economies transition towards long-term de-carbonization. This will cause rapid re-pricing of assets, and portfolio volatility for carbon-intensive investments.

Time for Climate Readiness is Now

Climate risks present a significant challenge for the insurance industry, since they are likely to increase over time. The efforts to respond at scale will take time, but with the long-term viability of the industry at stake, insurers should start acting now

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