If insurance companies invest the money from the premiums in financial markets, they must have an estimated amount of $582 billion globally, invested in fossil fuel investments. Well, those investments could be devalued when fossil fuels are phased out by 2050.
When climate change effects kick in, predicted winds begin to increase speed, rivers dry up and fires rage on for days, financial losses will be incurred.
As the climate moves aggressively to heat up, insurers face increased financial risks from payouts, and other incidents, such as floods and fires.
A 2019 global survey found that 72 percent of insurance companies believe climate change will affect their business, but have not taken significant steps to reduce risks.
Events related to climate change cost South African insurance companies an estimated R95bn in economic losses since the early 1980s, according to the International Disaster Database. A recorded 90 weather-related disasters affected about 22 million South Africans.
Global weather-related losses in 2020 alone, cost an estimated US$268bn of which only, US$97bn, was insured.
Insurance giant, Old Mutual, has responded to climate change with various actions, including, joining the Net Zero Asset Owner, the Alliance and Net Zero Asset Managers Initiative. It also maintained a B- score for CDP 2021and launched the global ESG Paris-aligned fund called the Global Equity ESG Fund.
Iain Williamson, Chief Executive Officer of Old Mutual says “we understand that climate change poses the biggest systemic risk to the world’s
emerging economies, including the countries in which we operate. We believe the evidence is strong and irrefutable. While climate change poses enormous threats there are also opportunities for the organisations that embrace the science and adapt in a
responsible manner.”
The company has its own climate change task force whose role is to facilitate a coordinated and structured response to identifying, assessing and responding to the Group’s climate-related risks and opportunities.
Several insurers are incorporating climate-risks in new-products and underwriting processes.
Others have publicly committed to reducing their exposure to carbon-intensive industries by 2030 or 2040.
Take Aon and Santam for example.
According to Aon, “unanticipated increases in weather losses can disrupt insurance statistical underwriting and claims assumptions unless climate change is incorporated into underwriting claim models.”
Santam has a crop insurance against climate change.
Many studies conclude similar findings. A study undertaken by McKinsey in 2020, suggests customers, shareholders, and regulators, are most likely to request insurance solutions that address risk mitigation.
Outcomes also suggest that since insurers understand risk better than any other business, the sector should be instrumental in mitigation and adaptation of climate change to protect economies. “In particular, the industry should develop products that cover climate-related risk specifically and should revisit its (potentially carbon-intensive) investment strategies.”
McKinsey research points out that hazards as a result of climate change, could increase, from an estimated 2 percent of global GDP to more than 4 percent of global GDP by 2050.
Another study by Deloitte titled “the Insurance Regulator State of Climate Risks” survey, found more than half of the regulators surveyed indicated that climate change was likely to have a high impact on available coverage and underwriting assumptions.
One-third of recipient regulators did not know how the insurers would cope with potential impacts of climate-related risks on financial stability.
Another third of the regulators interviewed in the Deloitte study, questioned models and their ability to challenge, capture and test climate-related risks.
A local thesis by a University student, Madzingira Nasha, back in 2016, titled “the effects of climate change on short term insurance” found the lack of properly recorded insured weather losses posed a major challenge. The existence of correlation and causality between weather variables and losses was also affirmed by the study.