Insurance Companies Have a Ways To Go In Dealing With Climate Change Risks

Hurricane Matthew just caused major flooding in parts of the Southeast. It's the country’s thirteenth billion-dollar weather disaster this year. A new Ceres report ranks the responses of the country’s largest insurance companies to climate change risks. What it finds is that while the disclosure and management of climate risks is improving by more U.S. insurers, most are giving minimal attention to it in terms of risks and opportunities.

The report, titled Insurer "Climate Risk Disclosure Survey Report and Scorecard: 2016 Findings & Recommendations," ranks property and casualty, life and annuity, and health insurers representing more than two-thirds of the total U.S. insurance market by direct premiums written. Ceres evaluated insurers based on disclosures companies made to a climate risk survey by the National Association of Insurance Commissioners (NAIC). There are five areas that companies were evaluated in, which includes governance, climate risk management, the use of catastrophe modeling or other modeling to evaluate and manage risk, greenhouse gas management and stakeholder engagement. 

The companies responses were evaluated on a four-tier scoring system: high quality, medium quality, low quality and minimal. The majority of the top-ranked companies, 16 out of 22, are property and casualty insurers. Through the policies they write for homeowners, businesses and vehicles they are directly exposed to climate risks. The six other top-ranked companies are life and annuity insurers. About two-thirds of the U.S. insurance sector’s total cash and invested assets are held by life and annuity insurers and the trillions of dollars they hold could be affected by affected by policy changes, technology, and physical risks during the transition to lower-carbon economy. 

A sizable part of the insurance companies evaluated (64 percent) scored in the low quality of minimal categories. One part of the insurance sector, health insurers, scored particularly low only four earned medium quality ratings and none earned a high quality rating. Eighty-nine percent of the health insurers earned low quality or minimal ratings. 

The report recommends that all insurance companies do four things:

  • Elevate climate risk leadership to the board and C-suite levels.
  • Consider climate and carbon risks in investment portfolios.
  • Engage with key stakeholders on climate risk and the benefits of policies that will strengthen climate resiliency and reduce carbon pollution.
  • Integrate climate risk into enterprise risk management frameworks.

A report by the Asset Owners Disclosure Project, released in August, found similar results. The report looked at the world’s 500 biggest asset owners and found that insurers are really lagging behind pension funds in managing high-carbon assets, low-carbon investment, and engaing with companies they invest in to reduce climate risk. Insurers manage a third of the world’s investment capital with about $30 trillion in assets. 

Here are some of the findings from the report: 

  • Only one percent of insurers are assessing the risk of stranded assets in their investment, compared with six percent of pension funds.
  • Only five percent of insurers are measuring portfolio carbon emissions, compared with 13 percent of pension funds. 
  • Only eight percent of insurers have staff that is dedicated to integrating climate risk into the investment process, compared with 16 percent of pension funds.
  • Only three percent have a policy that sets out how they engage with investee companies on climate risk, compared with 15 percent of pension funds.
  • Only 0.2 percent of insurers’ assets are invested in low carbon, compared with 0.6 percent of pension funds.

Only one in eight insurers (12 percent) managing a quarter of insurance assets are taking tangible action to mitigate climate risk, compared to one in four (23 percent) of pension funds that account for a third of pension assets.

Both reports highlight the need for insurers to better deal with climate change risks and opportunities. As Evan Mills, staff scientist at Lawrence Berkeley National Laboratory, stated in a report by the Climate Action Programme, there is a “huge opportunity” for insurers today to “develop creative loss prevention solutions and products that will reduce climate change related losses for consumers, government and insurers.” Indeed there is and insurers can’t develop them fast enough. 

Photo: Ceres