The Price of Climate Change
Climate change is causing a surge in extreme weather events and natural disasters, with data showing a significant increase in global incidents over the past decade. Data collected by the Institute for Economics and Peace shows an increase in global weather incidents from 39 in 1900 to 396 in 2019. The US has been particularly hard hit, with 338 “billion-dollar” weather and climate disasters since 1980, resulting in losses exceeding $2.3 trillion. Last year alone, 20 such events affected the counties of 4 in 10 Americans, resulting in $145 billion in insured losses. “They are not slowing down,” warns Adam Smith, the U.S. government’s lead scientist for analyzing billion-dollar disasters. The Swiss Re Institute estimates that the premium potential for these emerging climate change risks is currently $800 billion and climbing. One estimate even suggests that rising sea levels caused by climate change could generate over $14 trillion in global damage by 2100.
Insured losses from natural catastrophes have increased 250% in the last 30 years.
Climate change is leaving many Americans underinsured and local governments ill-prepared to handle the financial impacts of natural disasters. As climate change accelerates the erosion of physical infrastructure and increases the frequency of previously unrelated events, insurance companies are facing more significant losses. In response, some insurance companies are denying coverage to neighborhoods with the highest risk of climate-related damage, a practice known as “bluelining.” For example, following the 2017-2018 California wildfires, the state insurance department had to put a stop to this practice temporarily. Similar practices are common in areas at high risk of flooding, and these decisions disproportionately impact low-income individuals and people of color, who are more likely to live in neighborhoods at higher risk of environmental hazards.
In light of overwhelming scientific evidence of climate change, countries that have signed the Paris Agreement are committed to limiting global warming to 1.5°C above pre-industrial levels. Investing in plans to transition to a more sustainable future is crucial to achieving this goal. These plans outline how organizations and individuals can shift their assets, operations, and business models to significantly reduce greenhouse gas emissions. As environmental risks become more pressing, there is a growing need for investment in solutions that address these risks. Despite the importance of insurance in mitigating these risks and supporting these solutions, the insurance industry is often left out of discussions about transitioning to a more sustainable future.
The Role of Insurance in Climate Transition
The insurance industry is facing a double threat from climate change: their investments in fossil fuels and their liability for natural disasters. According to S&P Global Sustainable, the US insurance industry had $582 billion invested in oil, gas, coal, and other fossil fuel-extraction activities in 2020. Additionally, 215 companies covered by the same insurers could face $1 trillion in financial risks due to climate change. The insurance industry is beginning to take these risks seriously. For instance, the Federal Insurance Office has requested information on climate risks, the New York Department of Financial Services has provided guidance to companies on disclosing climate-related risks, and the National Association of Insurance Commissioners now requires more comprehensive reporting on climate-related risks. However, solutions to address these risks in the insurance industry are still in the early stages.
Insurance can profoundly impact decisions on which assets to insure and on what terms.
“Without insurance, power plants would not be built and cargo ships would not sail,” Butch Bacani, program lead, United Nations environment program’s principles for sustainable insurance initiative.
Regulatory pressures and public commitments to reach net zero emissions are pushing decarbonization to the forefront of corporate strategy. This shift towards reducing carbon emissions will impact everything from governance and operations to risk management, investments, and underwriting decisions. According to experts, the carbon transition is set to spark the greatest capital reallocation in a century, with an estimated annual investment of more than $9.2 trillion needed for energy and land-use systems. Insurance companies play a crucial role in this transition by de-risking the assets and projects driving decarbonization, as new climate technologies often have uncertain economic viability and scalability. However, corporate decarbonization strategies also come with their own set of risks, including:
|Physical||Damage caused by changes in climate patterns or extreme weather could lead to higher-than-usual claims payouts and losses in physical asset values.|
|Transition||Changing consumer preferences, market forces, business practices, or public policies could lead to declining market demand for carbon-intensive industries.|
|Liability||Litigation related to climate change could lead to high claims payouts for liability insurance policies.|
|Operational||Physical climate events could negatively affect an insurance company’s ability to carry out basic functions due to damage to physical property.|
|Reputational||Changing public attitudes about underwriting and investing in fossil fuel companies could lead to increasingly negative publicity for firms.|
Oka™, The Carbon Insurance Company, believes that insurance must play an important role in strengthening global economic resistance against climate-related risks. Oka wants to help create a more stable and transparent carbon credit market, resulting in higher-quality carbon offset projects that truly impact climate change.
Learn more about how we can help your organization offset its carbon emissions and achieve its sustainability goals.