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The Actuary The magazine of the Institute & Faculty of Actuaries

Urgent need to address growing $100bn annual climate risk ‘protection gap’

There is a growing need to address the increasing divide between economic and insured losses incurred as a result of climate change, according to research by ClimateWise.

Insurance industry 'under threat' ©Shutterstock
Insurance industry 'under threat' ©Shutterstock

Two reports, Investing for Resilience, and the ClimateWise Principles Independent Review 2016, show that this protection gap has widened from $23bn in the 1980s to $100bn (£79.51bn) today.

It is argued that as climate-related risks occur more often, previously insurable assets are becoming uninsurable, or those already under-insured are being further compromised.

Chair of ClimateWise, Maurice Tulloch, said: “The insurance industry’s role as society’s risk manager is under threat.

“The sector will struggle to reduce this protection gap if our response is limited to avoiding, rather than managing, society’s exposure to climate risk.

“As a risk carrier and risk manager, the insurance industry has significant, and as yet untapped, potential to lead others in reducing this gap.”

ClimateWise is a global network of 29 insurance industry organisations, which is convened by the University of Cambridge Institute for Sustainability Leadership.

Recent analysis by member Swiss Re found that, on average, only about 30% of catastrophe losses have been covered by insurance in the 10 years prior to 2014, leaving about 70% ($1.3trn) carried by individuals, firms, and governments.

The reports recommend insurers to align their asset management, underwriting and risk management, to support green bonds, resilience impact bonds, and invest in resilience-enhancing infrastructure.

“Industry leaders now have the opportunity to step up to the challenge outlined by the Paris Climate Agreement,” ClimateWise programme manager, Tom Herbstein, said.

“In particular, the industry must help shift capital flows into climate-resilient assets and resilience-enhancing investments rather than simply struggling to maintain its current underwriting exposure.”

There has been an improvement in the amount of disclosure insurance firms are giving in regards to climate risk, with the average score of ClimateWise's members increasing from 56% in 2015 to 59% this year.

However these latest reports argue that efforts need to be focused on closing remaining gaps in performance, in particular encouraging customers to reduce and manage their risk exposure and employee engagement.

“Climate change presents many risks and opportunities for insurers,” Jon Williams, partner, sustainability and climate change at PricewaterhouseCoopers, said.

“This year’s review highlights clearly that insurers can, and need to, do more, specifically within their own investment activities, in response to climate-related perils.“