Few industries will be impacted by the compounding effects of climate change as severely as the insurance industry. Extreme climate-related disasters have increasingly dominated the media. Some recent climate data has indicated that expansive wildfires, hurricanes, extreme flooding and prolonged droughts are negatively affecting more and more people. By taking timely action, the insurance industry can help lead change to combat the growing regularity of catastrophic events.

As climate change and associated risks continue to escalate, historical loss patterns may not accurately predict future hazards. The National Oceanic and Atmospheric Administration (NOAA) has been collecting data on disasters that produced more than $1 billion in inflation-adjusted damages since 1980. Approximately 285 disasters have occurred in the United States since 1980, at an average of seven disasters per year. Since 2015, however, the average number of billion-dollar disasters per year is 15.1, more than double the total average between 1980 and present. In 2020, a record-breaking and memorable year for many reasons, there were 22 billion-dollar disasters – a record. Clearly, disasters are becoming more costly.

High-cost disasters can test the solvency of homeowners insurers. One of the most memorable large-scale natural disasters in the United States was 1992’s Hurricane Andrew, which caused a total of 12 Florida homeowners insurance companies to become insolvent. After Hurricane Andrew, insurers attempted to substantially increase rates and non-renew insureds in risky coastal areas. Other changes following Hurricane Andrew included a heavier reliance on reinsurance, such as the initiation of Florida Hurricane Catastrophe Fund (a mandatory reinsurance in Florida that solely covers hurricanes), and the use of catastrophe modeling to better forecast potential losses from natural disasters, as opposed to relying on experience data.

Certainly, insurance company bottom lines are affected by the results of climate-related natural disasters. But while climate-conscious changes initiated by insurers can mitigate losses, can they also play a contributory role in shaping the future of environmentally conscious initiatives and the well-being of our planet? The insurance industry has a large influence on the economy and a potential influence on the trajectory of society by being a responsible corporate citizen and leading by example. Whether employing sustainable energy sources or making a commitment to reduce emissions, insurance companies can also help combat climate change and motivate society with an “invisible hand.” Practices in the best interest of our planet flow through to other aspects of the ever-growing global community.

1. Underwriting
2. Investments 
3. Internal emissions 
4. Products

Underwriting. Many forward-thinking companies have announced policies that limit their economic exposure related to the fossil fuel industry by excluding them from their underwriting or investment strategies. More than a third of the global reinsurance market has limited its responsibility for coal-related risks. In fact, Chubb was the first major U.S. company to pledge to stop writing new policies in the coal industry and phase out existing policies. Many other European companies, including Generali, AXA and Lloyds of London, have already announced similar plans. While these commitments to cut back on fossil fuel are important, it is even more important for corporations to follow through with the goals and promises they set. Although Chubb was the first in the United States to make a commitment to reduce its footprint in the coal sector, the company has recently been scrutinized for not doing enough to work toward net-zero emissions as it continues to insure coal and fossil fuel projects.

Investments. Additionally, insurance companies focused on mitigating their contributions to climate change will carefully consider the implications of the fossil fuel industry in their investment strategies. According to a 2018 study published in Nature Climate Change, trillions of dollars in fossil fuel assets will be stranded by 2030. These assets that produce less income can be costly to investors who were not anticipating a decrease in value, as well as to insurers who were not anticipating a decrease in premiums related to protecting such assets. While the oil and gas sector may see a decline, global electricity demand is expected to stimulate $23 trillion in renewable energy investments over the next 10 years. Investing in renewable energy may seem risky now, but the long-tail returns are positioned to outperform older energy sources and oil and gas industries.

Internal emissions. Another area of contributions from the insurance industry could involve internal emissions. The largest source of harmful greenhouse gas emissions from insurers typically includes business travel, real estate footprints, utility use and owned-vehicle fleets. Many leading insurers are making changes to reduce their emissions. MetLife, for example, has been carbon-neutral since 2016. Moreover, the changing landscape of office space and business travel needs due to the COVID-19 pandemic is pushing many companies towards reducing their footprints in these two high-emission areas.

Products. While making changes internally, insurers are recognizing the demand for eco-friendly product offerings as well. There is a wide range of opportunities to offer customers – eco-friendly material replacement endorsements, paperless discounts, usage-based auto insurance, and specific discounts and products tailored to consumers making eco-friendly choices. Travelers, for instance, offers premium discounts for customers with hybrid cars or energy-efficient homes. All of these offerings are inclined towards the same objective: lowering emissions that contribute to climate change.

During preparation for our Pinnacle University presentation in March 2021, an exciting development relating to green initiatives in the insurance industry took place: AM Best became a signatory for the United Nations Environmental Program Finance Initiative’s Principles of Sustainable Insurance. Paired with the United States rejoining the Paris Agreement and numerous insurance companies promising to cut back on their own emissions, it will be interesting to see what further and future climate-conscious initiatives the insurance industry will pursue.

Kate Maner is an actuarial analyst I with Pinnacle Actuarial Resources in the Atlanta office. She holds a bachelor of business administration degree in risk management and insurance from the University of Georgia and has experience in assignments involving loss reserving, loss cost projections and group captives. She is actively pursuing membership in the Casualty Actuarial Society (CAS) through the examination process.

Mark Murdoch is an actuarial analyst I with Pinnacle Actuarial Resources in the Bloomington office. He holds a bachelor of science degree in actuarial science from Illinois State University and has experience in assignments involving loss reserving, loss cost projections and group captives. He is actively pursuing membership in the Casualty Actuarial Society (CAS) through the examination process.

Rishabh Mohta is currently pursuing his masters of science in mathematics with a concentration in actuarial science and statistics at Illinois State University and will be graduating at the end of the fall 2021 term. He is actively pursuing membership in the Society of Actuaries (SOA) through the examination process.