Insurance industry paying increasing attention to climate change-related risks
climate change risk,” says Mills. “They expanded these collaborations into such projects as harmonizing economics-based insurer catastrophe models with climate models.”
New insurance products and services
According to the study, 1,148 climate change adaptation and mitigation activities have emerged from 378 entities in fifty-one countries, representing $2 trillion (44 percent) of industry revenue. For example, insurers have brought at least 130 products and services to market encouraging the spread of more energy-efficient homes and commercial buildings by paying claims that encourage rebuilding to a higher level of energy efficiency after a loss. At least sixty-five other insurance industry products address the risks and opportunities of the renewable energy industry.
Pay-as-you-drive insurance policies, now numbering nearly three million, offer auto insurance based on number of miles driven rather than a fixed premium. GPS technologies verify driving distances, and policyholders benefit from a more accurate insurance premium. The price signal of lower premiums for miles actually driven could reduce U.S. driving by 8 percent, and oil use by 4 percent, reducing the cost of driving by $50 to $60 billion per year because of a lower chance of accidents and reduced traffic congestion.
Another innovative class of insurance products insures financial shortfalls if projects underperform at delivering energy savings or low-emissions power generation. Some insurance products manage the risks of carbon-trading transactions, such as wildfires releasing carbon sequestered in forests. By assuming these risks and engineering the insured programs to minimize their losses, insurance companies pursue a broader policy objective of verifiable, bankable, persistent emissions reductions — all of which reduce the overall risks associated with climate change.
Leading by example is another type of climate change risk mitigation strategy being seen increasingly in the insurance industry. Many insurers have programs to reduce their own greenhouse gas emissions and purchase offsets, and twenty-six claim they have reached carbon-neutrality. A creative example is the mangrove restoration by Tokio Marine and Nichido Insurance Co. taking place in India and southeast Asian countries. Begun in 1999, this project is close to reaching its goal of restoring 8,200 hectares (more than 20,000 acres) of mangrove forests in coastal areas of seven countries. Mangrove reforestation reduces exposure of coasts to storm damage, and helps sequester carbon.
Developing world activities
“In the developing world, poor populations have little access to insurance,” says Mills. Decades ago, government and non-profit entities began issuing microinsurance policies that offer modest coverage in health, property, and life insurance for small premiums. Commercial insurers have followed suit, making tens of millions of these policies possible by integrating actuarial and environmental sciences into insurance models. Some of these products incorporate remote sensing and climate-sensitive methods to analyze the risks to crops and livestock.
There remain numerous opportunities to expand the innovation in the insurance industry, Mills believes.
Some assert that the industry has not done enough. The federal government is the insurer of last resort for floods and crops in the United States, but these climate risk techniques have not been applied to federal insurance programs. There’s also not much research in the field of loss modeling under future climates, or comparative risk assessments of climate change response options, which could help guide policymakers about how to adapt to changing climate.
Mills’ study nonetheless demonstrates that market mechanisms are playing a large and growing role in the insurance industry’s efforts to address the consequences of a changing climate. For more information, see here.
— Read more in Evan Mills, “The Greening of Insurance,” Science 338, no. 6113 (14 December 2012: 1424-25 (DOI: 10.1126/science.1229351); and Mills, “Insurance in a Climate of Change,” Science 309, no. 5737 (12 August 2005): 1040-44 (DOI: 10.1126/science.1112121)
