Report abstract: Non-life insurance and climate change

Insurance companies pioneering and promoting management of climate risks

Climate change affects all industries and functions of society. Increasing extreme weather events already cause a great deal of human suffering as well as environmental and economic damage. The insurance sector is one of the largest global industries and thus plays an important role in fighting climate change. Insurers build financial resilience to extreme conditions and physical risks by providing risk information, risk pricing expertise, innovative risk transfer products and services, and knowledge of damage prevention. The insurance sector also supports the transition to a carbon-neutral circular economy through insurance activities, investment strategies and the active reduction of its own carbon footprint.

The greatest threats of climate change arise from physical risks affecting both life and non-life insurance sectors. There are massive threats like floods, heat waves, droughts and forest fires – but diseases and pandemics are also equally concerning. Rapid escalation of climate change can dramatically affect both chronic and acute risks, making adaptation and mitigation the cornerstones of maintaining insurance capacity. Growing risks and changing attitudes will also affect who will be insured in the future; many investors have already withdrawn their investments from companies that create heavy environmental load. On the other hand, new products and businesses have already emerged to meet new investor and consumer demand.

Non-life insurance helps to adapt to changing risks

Not all harm caused by climate change is covered by traditional non-life insurance. Non-life policies compensate for damages caused by sudden and exceptional phenomena. It can be challenging to define and value the content of insurance cover when the future is as unpredictable as it is.

Uncontrolled climate change equals an uninsurable world: non-life insurance needs a predictable and balanced market and a stable society to function. In order for a risk to be insurable, the insurer must be able to identify and specify the prevalence and severity of potential hazards and the resulting losses, confirm that the insured events are unintentional and unexpected, and demonstrate that it is able to absorb potential losses while maintaining solvency and avoiding large accumulations of risk.

Climate change threatens to make some regions and activities uninsurable, and insurance coverage will not even be sufficient if risks keep growing. In Europe, currently only 35% of losses caused by extreme weather and climate events are insured, and there are concerns about the future affordability and coverage of insurance for natural disasters. In extreme climate change scenarios, serious damages and disruptions may also become uninsurable simply because of their significantly increased frequency. This could wreak havoc on the economy, the society and the overall security of people.

Extreme weather events are not spread evenly, which makes knowledge of local risks valuable information. The effort to maintain insurance capacity while promoting adaptation and resilience is vital for the society but also for the insurance sector in the long run. Insurers must therefore engage in dialogue with the public sector regarding climate change adaptation and the resilience of the society. The public sector’s own risk management strategies, building regulations, land-use planning and flood risk regulations are essential risk management tools. As risks increase, public-private partnership becomes ever more important.

Norway, for example, has an advanced, shared climate risk database as a result of years of cooperative work. The database contains information on risks and vulnerabilities related to natural phenomena, and the data is gathered from multiple sources.

Through their products and services, insurance companies can promote financial resilience for extreme weather events, encourage the reduction of greenhouse gas emissions, enable the commercialisation of responsible and low-CO2 products, and promote carbon sequestration. By insuring new clean technology, insurance companies reduce the risks associated with the technology and thus promote a transition towards cleantech.

The insurance sector also helps to understand the economic risks of climate change by conducting research and providing information. Insurers have the opportunity to change society, e.g. through changes in urban planning and building regulations. Annual updates of non-life insurance contracts and continuously evolving calculation models are essential in order for insurance policies to account for climate change. An additional challenge, however, is the large gap in insurance coverage, which is even growing in some areas.

Finance Finland commissioned the study on the role of non-life insurance in the changing climate from Positive Impact Finland. The study involved interviewing a large group of Finnish and international insurance experts and reviewing numerous written reports on the subject.