Influential role seen for insurers as climate risks rise

Reinsurers and insurers can have a profound impact on positive climate change outcomes by influencing the behaviour of businesses and households, a report from global law firm Kennedys says.

Underwriting and pricing is set to be overhauled due to climate risks, and insurers have an opportunity to evolve business models so the emphasis is on helping customers to build resilience and risk mitigation, the report says.

Kennedys Partner John Bruce says businesses ahead of the game on climate are much more likely to succeed, similar to the examples of those at the forefront of the industrial revolution and the move to the digital economy.

“The growth in sustainability and climate-related issues impacts on all types of insurance policies for the simple reason that climate risks are a constant, growing concern,” he said. “From an underwriting perspective, changes in practice will be required to price climate risks more accurately in the future.”

The report flags more forward-looking approaches to risk assessment and an expansion in the range of parametric products.

“We are also seeing much greater interest in innovative policy wordings aimed at encouraging good behaviour,” the report says. “These are currently focused on ‘build back better’ clauses, which provide increased cover for the implementation of loss resistant/resilient measures.”

Insurers now have greater clarity about their climate disclosure requirements, but challenges remain in harnessing environmental, social and governance (ESG) data when pricing risk during the underwriting process, in particular for SMEs.

“Few governments are actively promoting climate mitigation among SMEs,” the report says. “However, as we saw during the pandemic, SMEs can often find themselves highly exposed when faced with unexpected ESG business risks.”

The “Rewriting the risk: Addressing the challenges of climate change” report, says the litigation landscape is active, with more than 1900 global cases ongoing and concluded as of May. The vast majority have been filed in the US, followed by Australia.

Actions are centring on claims against contributors to climate change and cases against companies accused of “greenwashing” to mislead environmentally conscious consumers or investors.

Organisations targeted over “greenwashing” are increasingly likely to be widened to include financial institutions, mining companies, airlines, producers of single-use plastic or organisations that have made unsubstantiated representations regarding green credentials, the report says.

“Without insurance, most of these organisations would be unable to function,” it says. “As a result, insurers are seen as financial enablers, and with the perception that they have deep pockets, they too could be the focus of litigation if they continue to insure those policyholders who refuse to put in place and implement robust decarbonisation plans.”

The report, which incorporates views from leaders in insurance, recommends businesses embed climate mitigation within governance changes and senior leadership; enhance disclosure; develop net zero plans; reduce emissions across the value chain; take steps to ensure conduct is fully compliant with objectives; and that they seize the opportunities.