What Is Climate Change Doing To The Insurance Industry

Fiscal regulators worldwide are grappling with the impact of climate change and the increasing risk it presents for fiscal systems, while climate scientists call for rapid reductions in greenhouse gas emissions to forbid a climate disaster. At the same time, U.South. insurers remain highly exposed to fossil fuel-dependent industries like oil, gas, coal and utilities, and the step of change in the industry is wearisome.

Globally, the insurance industry is in a unique position when it comes to climate gamble as insurers are exposed on both sides of the balance sheet: Their investments face climate risk on the asset side of the balance sail, and they face up underwriting hazard, particularly in the property and prey line, on the liability side.

As companies and investors get to grips with the risks of rising global temperatures, climate stress testing is becoming more commonplace across many parts of the globe — with eye-opening results for insurers. France's fundamental bank, for instance, released the first results of its climate stress tests earlier in 2021: It found that natural disaster-related insurance claims could increase up to five-fold in the nation's well-nigh affected regions. That would crusade premiums to surge as much as 200% over 30 years.

In a globe first, the French primal bank conducted a climate stress test on its financial sector. Listen to this episode of ESG Insider, a podcast hosted past S&P Global Sustainable1, to hear an interview with Laurent Clerc, manager for enquiry and adventure analysis at the supervisory arm of the French primal banking concern, which conducted the world's first climate stress tests.

In the U.K., regulators are working to analyze transition and concrete risk through the Depository financial institution of England'due south climate change stress tests, which will ultimately aid shape the strategic objectives of both insurers and banks.

And in the U.S., President Joe Biden issued an executive society at the beginning of 2021 that is expected to usher in sweeping climate-related disclosure requirements and standards. The order directs the U.S. government to more actively help fiscal institutions and other market place participants understand and tackle growing sustainability risks.

Momentum is also building in the U.South. for heightened scrutiny at the state level — and that matters because states play a unique role as the primary avenue for regulating the nation's insurance manufacture. This differs significantly from other financial industries, where the U.S. federal government has more influence.

Increasing frequency, severity of natural catastrophes impacts property and casualty insurance

"On the underwriting side, one has only to look at both regional and global losses that are driven by catastrophic conditions events that in turn are existence driven by climatic change to understand the enormity of the exposure that insurers have." – Dave Jones, onetime California Insurance Commissioner, speaking at a June 16 webinar hosted by S&P Global Sustainable1.

Through the property and casualty business organisation line, insurers extend coverage to structures, holding and property that may become destroyed, damaged, or vandalized, among other things. Over the past two decades, climate change has intensified extreme weather events. For example, in 2020, the U.South. experienced 22 extreme conditions and climate-exacerbated disasters that each had losses in backlog of $1 billion, according to figures the National Oceanic and Atmospheric Assistants released at the beginning of 2021. Those events collectively caused at least $95 billion in damages, killed at least 262 people and injured scores more, according to NOAA'south National Centers for Environmental Information.

According to inquiry from S&P Global Sustainable1, 66% of major global companies have at least i asset at high risk of concrete climatic change impacts.

The increasing frequency and severity of sure natural catastrophes has caused insurers to rethink their approach to underwriting coverage. Often, this results in decreased affordability and availability of insurance in certain disaster-prone areas.

When individuals cannot purchase insurance in the U.S. private market place, they are forced to seek coverage through a state-backed insurer of concluding resort, or remain uninsured, causing people to rely on funds from the Federal Emergency Management Agency or other government entities when there is a loss.

California, for example, saw residential non-renewals by insurance companies grow statewide by 31% from the terminate of 2018 to the terminate of 2019. When residents are denied traditional coverage in the state, they must turn to other admitted carriers, surplus-lines insurance or California'due south Off-white Plan, an association of insurers that acts as a provider of last resort. Fair Plan policies increased 36% statewide over the same period.

Despite climate concerns, rise fossil fuel investment

"We can't be cognitively anomalous in a mode that you may exist investing in the all-time renewables out there, only and so undermining information technology with underwriting practices … At that place is a large opportunity within insurance companies, inside the insurance industry, to really have that total residual canvass approach [to] sustainability. I call up there are more and more insurance companies who are doing that, but bluntly, the vast majority have non even so come to that calendar." – Butch Bacani, Programme Leader UNEP Principles for Sustainable Insurance, speaking at a June 16 webinar hosted by S&P Global Sustainable1.

To meliorate understand the climate-related risks and opportunities that insurers face, S&P Global Sustainable1 analyzed about four,000 insurance investment portfolios across the U.South. insurance industry representing nearly $6.v trillion in avails under management. Equally of yr-end 2019, the U.Southward. insurance industry had $582 billion invested in some combination of oil, gas, coal, utilities and other fossil fuel related activities, a slight increment from $519 billion in 2018.

However, the percentage of fossil fuel-exposed assets held steady at 9% as total assets nether management grew year over year.

Levels of exposure to carbon intensive sectors among individual insurers' portfolios varied dramatically. For example, well-nigh 1,000 portfolios had no measured fossil fuel exposure, while a handful of insurers had fossil fuel exposure that exceeded thirty% of total assets. This highlights the need for deeper analysis on climate-related risks and opportunities at the asset level.

Several influential state regulators, including the California Section of Insurance and the New York Department of Fiscal Services, accept expressed business about the corporeality of insurers' investments that are exposed to fossil fuels as they have potential to become stranded assets — those are avails that experience unexpected or premature write-downs or devaluation caused past innovation, changes in the market or other factors.

In 2016, Dave Jones, who was California's insurance commissioner at the time, asked that insurers doing business in California voluntarily divest from thermal coal. He said at the time that the request felt appropriate due to his "statutory responsibility" to ensure insurers address any potential financial risks in the reserves that they keep to pay out claims. Several insurers complied with the asking.

Jones was too amid the first land regulators to require that insurance companies provide public disclosures of their investments in carbon intensive sectors.

Unique challenges for U.Southward. insurance regulators

Insurance regulators take been paying attention to climate change and the touch this has on insurers also as policyholders, whom they also take a sworn duty to protect. In the U.Southward., most aspects of the insurance industry are regulated at the state level, with state insurance commissioners having the final say on issues in many cases. Most insurance commissioners are appointed, while a small handful are elected.

The unique manner that insurance is regulated in the U.S. can make it difficult to reach a uniform approach across states for many different issues, including how to appropriately address climate change.

For example, Connecticut's Full general Assembly just passed a mandate in its state upkeep that directs Connecticut's insurance commissioner to submit a report biennially until 2032 disclosing the department's progress toward addressing climate-related risks.

Meanwhile, North Dakota Gov. Doug Burgum signed a bill in March that asks the state insurance commissioner to study the availability, cost and risks of insurance coverage for the coal industry, and evaluate whether at that place is a demand for a state-based insurance product for the sector that would insure against risk at an "appropriate cost." The directive comes amongst waves of activist and investor pressure on insurers to distance themselves from coal and other emissions-intensive industries. This pressure level appears to accept yielded some results as some coal companies have reported difficulty in obtaining affordable insurance coverage over the past several years.

This is function of the reason why the National Clan of Insurance Commissioners, or NAIC, exists — to provide a forum where regulators from all 50 states, the Commune of Columbia and five U.Southward. territories can come up together to talk over issues, and to provide data and expertise to help insurance commissioners effectively regulate the manufacture.

Although the NAIC has its own staff, a scattering of insurance commissioners are also elected yearly to serve as NAIC leadership. The NAIC President in 2021 is David Altmaier, who also serves equally Florida's insurance commissioner. Altmaier chose to focus on climate and natural catastrophe risks and resiliency as ane of the group's master priorities for 2021.

The NAIC has too been active in considering climate risks. Information technology formed a Climate and Resiliency Task Strength, which is an executive-level committee that brings together regulators and experts with the goal of evaluating the potential solvency impact of insurers' exposure to climate-related risks. The chore force also works to develop climate risk-related disclosure, stress testing and scenario modeling.

At the federal level in the U.Due south., Biden's contempo executive order will as well accept a directly bear upon on insurance manufacture regulation. The order directs the Treasury Department's Federal Insurance Office to assess the adequacy of land regulators' oversight of insurance sectors equally it relates to climate hazard.

The opportunities ahead

Fiscal regulators in many parts of the world are first to crave greater disclosure of climate-related risks, equally well as incorporating climate change into stress testing scenarios.

Corporations in Australia and Europe, specially banks and insurers, are increasingly excluding coal and other fossil fuels from their investment portfolios and client lists. However, activists have frequently criticized insurers in the U.S. for being slower to motility away from fossil fuels than their international peers.

Several insurers have already committed to go out coal financing or speed upward efforts to do so. Co-ordinate to an activist report, the number of insurance companies withdrawing coverage for the coal sector doubled in 2019, with about 37% of the insurance industry's global assets earmarked nether plans to exit involvement in the coal sector. Certain insurers accept also pledged to drastically increase their dark-green investments.

And new regulations in some parts of the world could serve as a tool to help insurers assess climate exposure in their business organisation. For example, the European union introduced a "green taxonomy" as a mutual classification system for environmentally friendly investments. Simply put, it's a dictionary that defines what is sustainable and what is not by assessing more than 100 economic activities, spanning manufacturing to ship to insurance. The taxonomy is designed to steer companies as they adapt their business organisation strategies to climate modify, besides as aid investment funds gauge sectors based on their environmental performance.

According to research from S&P Global Sustainable1, 22% of U.S. insurers' total assets nether management were eligible for alignment with the sustainable activities outlined in the EU taxonomy equally of 2019. Green bond exposure grew to $12.62 billion in 2019 from $5.46 billion in 2018; it still represents a small fraction of all assets beyond U.Due south. insurance portfolios.

"Unless we actually become that sort of accommodation, and really take ESG seriously and have climatic change seriously, then we really haven't got much of a future as a business," said Yvonne Braun, Director of Policy, Long Term Savings and Protection at the Association of British Insurers, during a June 16 webinar hosted by S&P Global Sustainable1.

Scientists project that as average global temperatures continue to rise due to human-caused greenhouse gas emissions the number and intensity of farthermost conditions events would rapidly increment. A 2020 report by S&P Global Ratings found that h2o scarcity will impact 38% of counties in 2050 nether a loftier-stress climate scenario, presenting risks nether this scenario for their municipal water utilities, public-endemic ability utilities, and local governments. Heat wave run a risk volition go along to increase beyond all states and nether all scenarios to midcentury, with Florida particularly exposed.

But the conventional wisdom is that the insurance manufacture has historically been irksome to change in many aspects of its business. When information technology comes to assessing and addressing climate risk, that will need to change.

"If I were an insurance company CEO, I wouldn't wait until my regulator told me that I need to seriously address these risks," former California Insurance Commissioner Dave Jones said at the June webinar. "I would offset doing it now."

Source: https://www.spglobal.com/esg/insights/climate-risks-for-insurers-why-the-industry-needs-to-act-now-to-address-climate-risk-on-both-sides-of-the-balance-sheet

Posted by: millerwervaing.blogspot.com

Share this post