Understanding and responding to climate risks | Strategy& - Strategy
Understanding and responding to climate risks | Strategy&
For insurers, climate change presents the single biggest risk - and opportunity - in the coming decades. Insurers need to understand how three main categories of climate risk - physical, transition and litigation risks - will affect them and they must respond appropriately or else their financial viability may be endangered. But the message is not all negative, say Gulbahar Tezel and Mukund Rajan of Strategy&: "If you are in the business of risk, these are exciting times. There are real opportunities for insures that position themselves well in response to a decarbonizing world." A new Strategy& report to which both contributed, 'Maximising Impact', describes the actions insurers can take to thrive in the face of climate change.
To address climate change, policy makers are setting ambitious decarbonization goals and designing incentive schemes. These initiatives are reshaping sectors and economies by phasing out carbon-intensive technologies in favor of greener alternatives. As a result, the demand landscape for insurance products will be reshaped impacting both the assets insured and pricing strategies for insurance products. To remain relevant in a such a decarbonizing economy and take advantage of new opportunities, we recommend insurers do three things.
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Related Knowledge Center: Climate economics
Climate change is now a driver of the world’s economy. The impact is profound:
- Catastrophic weather events — hurricanes, floods, droughts, high temperatures — are more frequent and more extreme. The cost can be measured in both the initial damage caused and the longer-term impact on the economy.
- Vulnerable communities are increasing climate-related investments, hardening infrastructure and taking other protective measures.
- Investment in carbon capture and storage technologies is increasingly rapidly.
- Governments are making investments and crafting regulations to reduce emissions of carbon dioxide and other greenhouse gases.
On top of all of this is the cost of uncertainty. As the Fourth National Climate Assessment, released in 2018 by the U.S. Global Change Research Program, says, “The assumption that current and future climate conditions will resemble the recent past is no longer valid.”