The global climate crisis presents a massive challenge for insurers. The most evident risk is for property underwriters. If insurers have not properly accounted for their exposure to extreme weather events — such as hurricanes and wildfires, which are happening more frequently as the world heats up — they could end up with huge unexpected losses.
Since insurers can reset premiums every year, it should be relatively easy to hike up rates to account for increased costs from climate-related catastrophes, but creating accurate projections can be challenging.
Seth Rachlin, executive vice-president at consultancy Capgemini, says there are two factors to consider when looking at how climate change alters catastrophe risk: frequency and severity.
Property insurance rates are on the rise as the increased frequency of extreme weather is factored in, but the industry’s projections on increased severity leave a lot to be desired, he says. “The modelling has to catch up with the last season. Every year new models come out, but every year we see [events that should only happen every 100 years].”
Climate advisory group Jupiter runs different weather models to determine probabilities that extreme events will happen. The data is used by insurers to set premium rates. Yet more unpredictable weather makes modelling harder, which could either mean risk is not properly accounted for by insurers, or large price hikes for their customers.
For now, the immediate risk is partly mitigated by the money flowing into reinsurers, Mr Rachlin notes. Those reinsurers act as a backstop, so when disasters strike, insurers have easy access to capital to pay out claims. “With adequate reinsurance you can write any risk,” he says. “The good news is there is still a good supply of capital in the reinsurance market because hedge funds and pensions have been attracted to insurance risk [because it] is not correlated with traditional markets.”
Most flood insurance in the US is also covered by the Federal Emergency Management Agency’s (Fema) national flood insurance programme, although that means US taxpayers are footing the bill.
The other big threat comes from within insurers’ investment portfolios. Most insurers have large hoards of assets that they use to pay out claims when a disaster strikes. If they have not accurately calculated the risk that climate change creates for those assets, they could find themselves in line for substantial losses, since the income from these assets might not adequately match claims liabilities.
But since risk is at the core of what insurers do, many have already been taking proactive steps to mitigate the damage that could come with the warming planet.
In 2018, Munich-based Allianz started working to make its investment portfolio carbon neutral by 2050, says Günther Thallinger, member of the board of management Allianz. That effort might include ditching its holdings in big emitters, Mr Thallinger says, but the company’s primary strategy to transform its portfolio is to put pressure on the companies it owns to decarbonise their business models.
Yet even though Allianz is a large investor — it has about €550bn in investments — there is only so much any individual fund can do. To remedy this, Allianz has joined up with about a dozen other large asset owners in the so-called Net- Zero Asset Owner Alliance. The group, which also includes Californian state employees pension fund CALPERS, has around $2.3tn under management, and plans to use that heft to drive meaningful reform. The group is also actively looking to recruit new members.
Mr Thallinger says a big part of Allianz’s carbon-neutral strategy will be to invest in “carbon negative” technology. “There might be companies we are owning or financing that even with the best forms of technology might not get down to climate neutrality,” he says. “We need assets — in a positive sense — that are emissions negative.”
Allianz already has some holdings — such as forestry investments — that fill that role, but Mr Thallinger says it plans to go further and put money into new technology, such as systems that can pull carbon from the atmosphere and use it to create new renewable fuel.
Many other insurers are looking to take similar steps. In its annual global insurance industry research, BlackRock found that more than two-thirds of insurers are incorporating sustainability considerations in their investment decisions. However, there are concerns about investment performance holding back more widespread adoption of ESG investing.
“The continued demand for sustainable investment opportunities is indicative of a broader industry trend, but insurers still seem to have some concerns about the return trade-off and how best to embed ESG principles into a portfolio,” says Patrick Liedtke, Blackrock’s head of the Financial Institutions Group for Europe, Middle East and Africa. “In many ways, this is to be expected when dealing with a relatively new sector of the industry. Overall, it is encouraging to see signs of progress in an area that we see as critical in years to come.”