For an industry built around risk management, insurers have been slow to react to the risks of climate change. As we’ve seen, the industry may be at an inflection point on this issue. Insurers are developing climate change-specific products and working with clients and governments to manage risk.

While the impact of such actions is significant, the most powerful tool at the disposal of insurers is the capital they manage, which is estimated at over US$30 trillion. This post will look at how insurers might change asset management strategies as the industry reorients around climate change.

Climate change and insurance asset management

Insurance is an inherently competitive industry. Insurers receive premiums up front and pay claims later, if at all. This business model leaves insurers holding large amounts of capital that will eventually go to others. In the meantime, it can be invested for the insurers’ benefit. This structure attracts an understandably elevated level of competition. Indeed, competition in P&C underwriting can be so intense that the Economist projects a net underwriting loss for the industry in 2016. Investments are the real sources of profit for much of the industry.

But climate change has major implications for investors of all sizes. The famous Stern Review prepared for the British government in 2006, found that climate change could reduce global GDP by five to 20 percent per year by 2100. More recently, the BlackRock Investment Institute argued last year that “investors can no longer ignore climate change,” and “all investors should incorporate climate change awareness into their investment processes.”

Three ways of making resilient investments

Research from ClimateWise details what that could mean for insurers. ClimateWise is a partnership between the University of Cambridge’s Institute for Sustainability Leadership and the insurance industry. Its “Investing for Resilience” report, released in late 2016, urges insurers to consider “resilience” within their investments. The report highlights three principal ways of doing this:

  • Select investments that boost climate resilience directly. These include flood mitigation infrastructure, public health projects, or drought defense measures.
  • Invest in resilient assets, like property that is resilient to climate risks or the equity of resilient companies.
  • Invest in “resilience boosters”—that is, companies which enhance the resilience of their clients.

As the report’s introduction acknowledges, the industry has not done much to promote climate resilience to date. But the size of companies associated with ClimateWise—which include Allianz, Aon, Aviva, Hiscox, Marsh, Llloyd’s, Navigators, Prudential, and Zurich—may indicate that this will soon change.

Climate change bonds

Some insurers are also developing financial instruments to boost investment in resilient infrastructure. Swiss Re partnered with the Rockefeller Foundation and RMS to develop “resilience bonds,” which aim to mitigate the financial risk of catastrophes while promoting investment in resilient infrastructure.

So-called “green bonds,” which have a more expansive definition than resilience bonds, have also attracted some attention from insurers. In 2013, Zurich Insurance pledged to invest US$1 billion in green bonds. Three years later, it raised its expectations to US$2 billion. Other notable green bond insurers include Aviva, Manulife, and Mercer.

Yet these firms are still in the minority. A Ceres report from October 2016 found that while most American insurers “are improving their disclosure and management of climate risks, most are still giving it minimal attention, both in terms of risks and opportunities.” Whether the industry is at a tipping point in this regard will only become clear in hindsight.

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