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The insurance industry is already taking action to address the climate change challenge, but external hurdles hinder the expansion of the sector’s contributions, according to a new report.
The report, Climate Change and the Insurance Industry: Taking Action as Risk Managers and Investors, was published on Monday by The Geneva Association, an international think tank of the insurance industry, and is based on interviews with 62 C-level executives at 21 globally active insurers and reinsurers conducted from June to August 2017.
“The study has confirmed that climate change is a topic that has made its way up to the boardrooms of the insurance industry, although insurers are neither the polluters nor the policy setters,” Anna Maria D’Hulster, secretary general of the Zurich-based association, said in a statement Monday.
As risk managers and underwriters, the industry provides leadership in risk modeling and pricing, knowledge of preventive measures and innovation in risk transfer solutions, according to the report.
As investors, the industry, under its liability-driven approach, is constrained by fiduciary duties and regulations, according to the report.
“It is evaluating investment strategies and policies that increasingly integrate climate change considerations and conducting due diligence of their asset managers,” the report stated. Environmental, social and governance, or ESG, “is emerging as a predominant methodology — although with a few considerations.”
ESG refers to the three central factors in measuring the sustainability and ethical impact of an investment in a company or business.
Insurers are also addressing the operational side of climate change risk by reducing their carbon footprints, Ms. D’Hulster said.
But expansion of risk transfer solutions faces several hurdles, including limited access to risk information and related pricing difficulties; public policy, regulatory and legislative issues; lack of insurance awareness; weakness of domestic insurance markets; limited takeup of disaster insurance; regulatory barriers to accessing global reinsurance; and scalability and sustainability of insurance programs.
Meanwhile, the hurdles to scaling up green investments include limited market capacity to accommodate large-scale portfolio allocations; lack of appropriate price signals, such as the failure to price carbon; and data and transparency for informed investing, according to the report.
The Geneva Association made three recommendations, the first of which is for third-party stakeholders such as governments, policymakers, standard-setting bodies and regulators across sectors to work in a more coordinated fashion to address key barriers that hinder insurers from scaling up their contributions to climate adaptation and mitigation.
The insurance industry should also continue to institutionalize climate change as a core business issue, expand its contributions toward building financial resilience to climate risks, and support the transition to a low-carbon economy by collaborating with governments and other key stakeholders, according to the report.
Governments and the insurance industry should explore ways to support climate-resilient and decarbonized critical infrastructure through the industry’s risk management, underwriting and investment functions, according to the report.
The report is primarily based on interviews with chief executive officers, chief risk officers, chief investment officers and chief underwriting officers from insurers and reinsurers with total assets under management exceeding $4.7 trillion and a total premium volume in excess of $550 billion in 2016.
Insurers and reinsurers will benefit from a voluntary global framework established for climate risk disclosure released on Wednesday.