KLD BLOG » World’s Largest Industry Faces World-Changing Risks: Insurance Companies Prepare for Climate Change

World’s Largest Industry Faces World-Changing Risks: Insurance Companies Prepare for Climate Change

By: Sonya Hetrick | Friday, November 7th, 2008

The global economy depends on effective risk management by consumers, businesses and governments, which has helped make insurance the world’s largest industry. Insurance companies generate $3.4 trillion in premium revenue, plus another $1 trillion in investment income. Still, this vast accumulation of wealth – larger than the GDP of every nation except the US, China and Japan– may not be enough to hedge against the risks of climate change.

In 2007, the sustainability-focused investors coalition Ceres released From Risk to Opportunity: How Insurers Can Proactively and Profitably Manage Climate Change. The report explained that climate change could lead to losses for every sector of the industry:

• Property insurers could face massive damages from rising sea levels and increased incidence of Katrina-like storms.
• Health and life insurers could face claims due to climate change-caused famine, drought, or disease.
• Liability insurers would have to pay if companies are held liable for their greenhouse gas emissions.
• Insurance companies’ portfolios would lose value if climate change lowers investment returns, threatening the stability of those insurers and reinsurers, as well.

The pain of these blows to the insurance industry could spread throughout the world economy. As claims increased and revenues decreased, insurance would become less affordable and less available. This could shift more risk to governments and individuals.

While climate change threatens the insurance industry, it also offers opportunities for innovation. KLD research finds that several companies are actively responding to the challenge of climate change:

• CNP Assurances invested EUR 15 billion in the European Carbon Fund to help European countries meet their commitments under the Kyoto Protocol and the EU Emissions Trading Scheme.
• Swiss Re, in 2001, was one of the first financial services companies to establish a business unit to explore the business opportunities associated with reduced carbon emissions.
• Aon provides customers with carbon risk management consulting services to help them enter emissions trading markets.
• Fortis offers preferential rates for consumers who purchase energy-efficient appliances and improve home energy efficiency.
• AXA provides insurance coverage for wind farms.

Since their emergence in the 17th century after the 1666 Great Fire of London, insurers have helped establish the first fire departments, building codes, and product safety standards. Now, insurers can help lead a global response to a global threat. Lloyd’s of London, founded in 1688, recently put the problem in stark terms:

“The insurance industry must start actively adapting in response to greenhouse gas trends if it is to survive.”

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