With at least $1.8 trillion in written U.S. premiums as of 2014, the insurance industry is critical to many Americans’ financial security.
And no matter where you stand on how much risk climate change poses to citizens’ property, health and security, the evidence suggests it's probable that weather-related events will continue to cause harm to homes, businesses and even human health in the coming years.
The truth is that when their employees underwrite policies, it behooves insurance companies to consider all risks – the basis of which is largely past history. Yet the recent increase in weather-related events appears to go unnoticed by insurers in long-term decision-making.
On that point, this month Ceres, an advocacy group that campaigns for more sustainability leadership throughout the business community, issued a report on how insurance companies are responding to climate change risks.
The Boston-based NGO concluded that while there is some improvement within the sector, many insurers underwriting policies in the U.S. are still “turning a blind eye” to the evidence that climate-related events could have a negative impact on their portfolios.
In fact, out of the almost 150 large insurers Ceres surveyed, the NGO’s analysts gave only 22 companies high marks for considering climate change as an issue that presents threats as well as opportunities.
In terms of how the insurance industry is responding to climate change, Ceres acknowledges improvement from previous years. Back in 2014, when the organization completed a similar study, only nine insurers -- or 3 percent of those surveyed -- said they incorporated climate change risks into their long-term strategic planning. Nevertheless, insurance firms have a long road ahead if they are truly going to protect their assets – or even find ways to create new products or pricing structures that address potential threats to their businesses.
Ceres’ conclusions are aligned with similar studies of the global financial sector taken over the past year. Zillow, the online property database company, suggested that as much as $1 trillion in U.S. property losses may occur over the course of this century. And a survey earlier this spring posited that millions of pensions worldwide could be at risk due to holdings in carbon-intensive industries becoming stranded assets.
Most of the insurance companies to which Ceres offered high scores are property and casualty insurers. That should not be too much of a surprise, considering the damage left by hurricanes such as Matthew and Sandy. The NGO called out Germany-based Allianz, for example, for launching several board committees that routinely address climate change issues. One group within Allianz monitors investments, another examines underwriting policies, and another assesses sustainability risks as well as how environmental factors are embedded within the company’s activities.
Companies that provide life insurance and annuities policies, including Aegon and MetLife, scored high marks for improved disclosures on climate change risks over the past two years. MetLife won praise for having a frank discussion about how climate change could potentially affect its business, and also backed those words with action -- as in, considerable investment in clean energy technologies. Aegon was highlighted for its commitment to the consideration of environmental and climate change issues when screening potential investments.
Depending on how one interprets Ceres’ data on health insurance companies, however, these firms remain largely silent or oblivious to the potential climate impacts on their business models.
Kaiser Permanente was the only health insurer that scored high marks for its aggressive stakeholder engagement efforts to support research linking the effects of climate change on public health.
One would assume the links between an aging population and a warming planet would nudge health insurers to take a hard look at their investment programs, but Ceres alleges that most companies in the space are either silent on climate issues or have completely overlooked these risks.
So, what are Ceres’ recommendations for the insurance industry in order to secure its long term viability?
First, climate risk leadership must be integrated across a company’s entire C-suite and board -- as in, an executive committee that focuses on assessing potential threats. Such leadership in turn would lead to tougher scrutiny of carbon-intensive assets, as well as how they can impact a firm’s overall portfolio. Such risks must also be integrated across insurance firms’ entire enterprise risk assessment frameworks, the NGO advised.
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