Foreword: The Geneva Association
Insurers and the transition to net zero
Maryam Golnaraghi, director of climate change and environment at The Geneva Association—aka the International Association for the Study of Insurance Economics—explains the challenges facing the insurance sector in the global transition to a resilient low-carbon economy.
The socioeconomic impacts of physical climate risks are escalating. Growing concentrations of people and assets in high-risk regions (eg, coastal and floodplain settlements), poor development choices and construction practices, aging infrastructure, and supply chain vulnerabilities further exacerbate these impacts. According to the Intergovernmental Panel on Climate Change, since 2008, over 20 million people annually have been internally displaced due to extreme weather-related events.
Insurance claims in mature markets are rising, but climate change alone is not yet affecting the insurability of natural catastrophe risk, except perhaps in certain wildfire zones. It is a different story in developing countries, where insurance penetration is limited, as disasters lead to loss of lives and livelihoods, the destruction of critical infrastructure and further impoverishment.
Looking ahead, the long-term affordability and accessibility of insurance for physical risks requires a risk-based, system-based and all-of-society approach to reducing existing and preventing new risks.
The compounding effects of physical climate risks are also challenging energy security and economic development. The impacts of extreme heat and water shortages on energy infrastructure in Europe this summer were an early warning of the need to rethink energy security. Energy production from hydroelectric, solar and nuclear power dipped, while reduced river levels compromised coal and oil shipping. Expanded powerlines led to higher electric resistance and less efficient electricity distribution, and wind farm extensions were set back due to inflation and rising interest rates. This was exacerbated by compromised gas and oil supplies due to the war in Ukraine, all of which highlights the need to expedite the clean energy transition.
Decarbonising the global economy is fundamental to controlling the cost of climate adaptation measures and an unprecedented, cross-sectoral transformation is needed to achieve ambitious net-zero targets over the next few decades. Yet, there are many uncertainties associated with public policy, legal, regulatory, technology, and markets as we look ahead.
Meeting the global climate targets as set by the Paris Agreement requires expediting the large-scale deployment of new technologies that are currently at the pre-commercialisation stage. The World Economic Forum estimates that approximately $50 trillion in incremental investments is required by 2050 to transition the global economy. This cannot be provided by public funding alone and will necessitate the mobilisation of private capital.
“Decarbonising the global economy is fundamental to controlling the cost of climate adaptation measures.”
Maryam Golnaraghi, The Geneva Association
Tech brings new risks
New technologies, industrial processes and infrastructure systems come with myriad risks that need to be assessed and managed with a full life cycle view to attract large-scale capital. Left unmanaged, they may pose financial and reputational risks to organisations and even lead to litigation risk.
Research by The Geneva Association, “Climate Change Litigation: Insights into the evolving global landscape”, has revealed that climate change is already leading to an uptick in litigation cases against corporations and governments. Those who suffer or expect to suffer loss as a result of climate change are pursuing judicial remedies and looking to recover damages or fund abatement efforts. Others are using litigation as a tool to leverage more ambitious climate policy and actions, or to oppose them.
The Geneva Association Task Force on Climate Change Risk Assessment has detailed how these physical, transition and litigation risks and their interactions may impact P&C and life re/insurers. The latest report “Anchoring Climate Change Risk Assessment in Core Business Decisions in Insurance” offers practical guidance for company boards and executive management on developing decision-relevant, forward-looking climate change risk assessment to test the resilience of their business models under different climate scenarios and create viable transition and risk management strategies.
In a new research project, we are exploring opportunities for re/insurers to offer innovative risk transfer solutions, to help enable the commercialisation of climate technologies and make investment decisions that support climate mitigation. However, a series of potential challenges need to be addressed: access to a pipeline of projects; a lack of technology-specific risk information and technical expertise; regulatory requirements around cost of capital associated with pre-commercialisation technologies; and the need for engagement with the project financing community from the early stage.
To better tackle the risks associated with shifting to a resilient low-carbon economy, access to data and new tools to assess these risks and their interactions, plus a forward-looking approach, would be needed. Re/insurers can build further and share risk management expertise, engage with their insureds and investees, strengthen industry-level collaboration, and establish intersectoral partnerships with a wide range of public and private sector stakeholders to implement and develop innovative solutions together.
To find out more visit genevaassociation.org
Image Credit: Shutterstock.com / khunkorn
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