Uninsurable world? The implications of insurance withdrawal in the face of climate change

Marie-Anne VincentVP Strategy & Regulatory
15 June 2023

It’s unquestionable that insurance plays a vital role in today’s economy and society, safeguarding businesses and individuals against operational risks and climate and environmental hazards. However, as the world grapples with the increasingly severe impacts of cyclones, hurricanes, rising flood waters, and uncontrollable fires, a disquieting question emerges: What if insurers were to withdraw their support?

For years, we have witnessed the devastating consequences of the catastrophic events of global warming, prompting us to ponder the future of economic activity without the safety net of insurance. The foundation of the insurance sector lies in assessing the probability of events and determining associated risk premiums. But what happens when an event's probability reaches 100%? Should we contemplate a world where homes, local authorities, regions, and companies are left without coverage? 

The uncertain future of insurability: From +2°C to +4°C

On the eve of the historic COP21 in 2015, Henri de Castries, the former Chairman of Axa, offered a thought-provoking insight into the relationship between climate change and insurability. He stated, "a world at +2°C might still be insurable, but a world at 4°C would certainly no longer be insurable." 

This statement underscores the urgent need for insurance companies to develop a sophisticated understanding of the evolving risks posed by climate change. To effectively manage these risks, insurers must carefully assess their underwriting portfolios and account for the environmental impact of their coverage. 

Traditional reliance on historical data may no longer suffice in accurately evaluating the risk and potential losses from claims associated with climate-related events. As the effects of global warming intensify, insurers must adapt their business models and incorporate forward-looking climate risk and assessment methodologies that account for the increasing frequency and severity of climate-related events. By embracing these challenges and proactively addressing the implications of climate change, insurance companies can play a vital role in building resilience and ensuring the insurability of the world's most vulnerable assets and communities.

The escalating climate-related risks encompass not only the immediate impacts of extreme weather events but also the broader implications of transitioning to a low-carbon economy. Transition risk arises from the shift towards decarbonization and the potential economic disruptions it may cause, especially for carbon-intensive industries. These sectors face the challenge of aligning their operations with emerging regulations and changing market preferences, making their future viability uncertain. On the other hand, there are many examples of physical risks relating to the direct consequences of climate change, such as forest fires, rising sea levels, heatwaves, and storms, which can lead to widespread damage and disruption across various sectors. 

Insurance companies are in a unique position – they must consider both transition and physical risks while determining their investors' own exposure and risk appetite and developing strategies to address these challenges. 

A changing insurance industry?

The insurance landscape is witnessing significant shifts in response to the escalating risks posed by climate change. 

In California, notable insurers like Allstate and Statefarm Insurance Agency have taken a cautious approach, ceasing to underwrite new insurance policies for homeowners, condominiums, and businesses. The decision is primarily driven by the escalating costs associated with insuring customers in California, stemming from factors such as wildfires, higher home repair expenses, and increased reinsurance premiums. 

Meanwhile, on a broader scale, several major insurers and reinsurers, including Lloyds, AXA, Sompo, Allianz, Scor, Munich Re, and Swiss Re, have disassociated themselves from the Net-Zero Insurance Alliance (NZIA). This move follows a letter sent by 23 US state attorneys general expressing concerns over potential legal issues tied to the collaborative actions of NZIA members in promoting an activist climate agenda. 

The affected attorneys general specifically referenced possible antitrust law violations and state laws related to insurance refusal grounds as the basis for their apprehension. These developments underscore the growing complexities and evolving dynamics within the insurance industry in response to climate-related challenges and the need for both management and regulators' careful navigation to ensure sustainable and compliant operations.

What’s next for the Net-Zero Insurance Alliance (NZIA)?

The Net-Zero Insurance Alliance (NZIA) had set a deadline for its members to publish their plans for achieving a net-zero transition in their insurance and reinsurance portfolios by 2050, scheduled for the end of June 2023. While some insurers have expressed their intention to uphold their sustainability and climate commitments, the departure of significant industry players just before the publication of their transition plans raises concerns about the sector's ability to collectively reimagine its model and successfully adapt to a low-carbon world. 

A coordinated effort is needed

This development highlights the need for a comprehensive and coordinated effort within every sector of the insurance industry to effectively address the challenges posed by climate change. By pooling resources, expertise, assets, and strategies, insurers can better understand, manage, and mitigate climate-related risks, provide adequate coverage, promote resilience, and contribute to a more sustainable and climate-resilient future.


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