And just like that, water was scarce. Last summer saw cities rationing water. Pools were empty, sprinklers stayed off. In Germany, water was already sparse by the end of June, and the Rhine was barely navigable. Climate change is now undeniable and has a direct impact on insurance companies. When it comes to fighting climate change, insurers have a special role to play – one with both risks and opportunities.
Climate change and the threat to current business models
The effects of climate change can vary from region to region. Nevertheless, researchers agree that extreme weather events such as heavy rain and hail will become more common everywhere. This is especially bad news for property and casualty insurers. In some places, it will no longer even be possible to be covered in the event of a loss or damage – a fact that will greatly affect current actuarial models.
The periods of heat and drought predicted by climate researchers will also have a direct impact on business, albeit to varying degrees. The hardest hit will likely be providers of health insurance (more sick people), life insurance (increased risk of mortality), and property and casualty insurance (risk of fires, crop damage, etc.).
Given these risks – which are still difficult to assess – the German Insurance Association (GDV) established seven guidelines for dealing with the consequences of climate change.
Climate change also creates opportunities
It may sound paradoxical at first, but climate change also creates new opportunities (both direct and indirect) for insurers. Indirect opportunities involve new risks arising from changes in mobility and the production of energy.
Concretely speaking, these opportunities might include a policy that protects against defective heat pumps or an addendum to a building insurance plan that covers solar power or photovoltaic systems. Electro and automated mobility also call for new insurance solutions for things like batteries, which are the central components of electric and self-driving vehicles.
Climatic change also affects industries and companies that make direct use of natural resources. Since increased precipitation or periods of drought affect the yield of crops, agricultural companies will want to insure themselves against these risks. With parametric insurance solutions (such as those that are already available in the USA), events like heavy rainfall and protracted droughts can be covered according to the risk appetite of the company or organization.
The use of AI, especially in the area of “predictive analytics,” will play a key role in the insurance industry to ensure the risk of damage remains calculable and economical for individual companies.
Insurers as drivers of sustainability
Insurance companies are in a unique position to help protect the environment and limit the effects of climate change. Internally, a few obvious levers come to mind: increased digitization of processes to reduce paper, avoiding business trips, switching to more environmentally friendly means of travel, choosing sustainable materials for purchases and supplies, etc.
Externally, insurers can take advantage of their influence to promote climate protection – after all, as some of the world's largest institutional investors, their investment decisions shape the economy. By investing selectively (or ceasing to invest in certain sectors), insurers can actively pave the way to greater sustainability. Sooner or later, such decisions will no longer be a choice as customers are becoming more and more aware of climate related issues.
With the implementation of the EU Taxonomy Complementary Delegated Act, financial market participants will be required to provide information on their share of environmentally sustainable investments. The European Green Deal will help participants develop their strategies in accordance with the principles of ESG (environmental, social, and governance). By doing so, companies will not only appear more attractive to customers, but also limit their risk.
As a specialist in standard software, adesso insurance solutions helps insurance companies meet the challenges of the future. For more information, feel free to contact our expert Karsten Schmitt, Head of Business Development.
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