Perspective: detailed climate risk data sought from US Insurers

This could further change the way that insurance interacts with sustainability

After a bit of a break for Christmas and New year, The Sustainable Investor is back. Before we start - this is a shortened version of a longer blog that was previously published on The Sustainable Investor. You can read the full version here and see all of our other content, on our dedicated blog platform, you just need to sign in, by clicking here. Its all free for now, which seems to us to be very good value for money.

Today's perspective looks at a proposal from the US Department of the Treasury requiring insurers to provide five years of underwriting data, broken down by zip code, to help them understand risks of major disruptions in insurance coverage in different areas of the country driven by climate change. 

This combines two big themes we think both sustainability and finance professionals need to be watching closely.

The first, and most obvious one, relates to the impact of global catastrophe losses on insurers and the consequential willingness they show to provide insurance. Global natural catastrophe losses in 2022 are expected to reach USD112 billion according to reinsurance broker Guy Carpenter or 38 percent higher than the 10-year average. In some markets the cost of laying off these risks is rising, and in others the government is increasingly becoming the unwilling "insurer of last resort". As Alfonso Pating, from the National Resources Defence Council says "... if insurers don't integrate climate risk-related information into their assessments, they're mispricing their premiums." In some cases insurers are starting to manage this risk by materially increasing premiums, and in some cases choosing not to underwrite projects that adversely impact the transitions.

The second and less obvious theme is the growing interest among insurers in investing in projects that reduce the adverse impacts of climate-related risk. Its important to remember how the (simplistic) insurance industry financial model works. They take on risk from customers in exchange for receiving premiums. They use those premiums to invest and generate a bigger cash pool to cover administrative costs, costs of offloading risk, payouts for insured events actually occurring and hopefully provide a return to their investors.

The logic of climate adaption is that by spending a little now, they can reduce their liability for much larger payouts later. Examples could include co-investing in electricity grid resilience, to reduce the damage from storms and other climate events. Or, investing in flood relief, possibly via an industry wide levy, to make flooding claims less likely. Finally, another way to help mitigate losses to some extent is to enable recovery as quickly as possible. This is where the development of resiliency hubs can help, either organised publicly by local and federal authorities or privately. This would be a departure from how the insurance market has worked in the past, but then the future is likely to look very different, and so we should expect business models to also change.

Hopefully, we have started to get you thinking about how the impact of climate change on the insurance industry can have wider impacts on how finance interacts with sustainability. We are looking to write a longer blog on this topic shortly - if you sign up you will not miss it.