Insurers must wake up to climate change, says paper

17th February, 2011 by Anna Simpson

What role should insurance play in looking after the future of our homes and businesses?

Insurance is arguably one of the most important tools we have, when it comes to protecting the planet's most vulnerable communities against climate change. But, according to a paper by Forum for the Future, some developing countries could soon be regarded as 'uninsurable' – unless the insurance sector finds alternative ways to spread risk.

No modern economy could function without insurance – and, given our changing climate and its unpredictable impacts, none should. It's a vehicle designed solely with the future in mind. It spreads risk over time and space, and offers a safety net in case of sudden turns of fortune.

Responding to the Challenge of Climate Change, by the Forum's Director of Sustainable Financial Markets, Alice Chapple, argues that the huge risk that this represents has yet to be fully recognised by the insurance industry. Some countries and communities face more frequent losses from storms, floods, heatwaves and other catastrophic weather events. And so those which are less likely to be affected may prefer not to pool their risk with those which are more vulnerable.

Developing economies are particularly threatened, since everything is subject to unpredictable weather patterns, from homes and crops to businesses and energy supplies. For some countries, adequate insurance could be the difference between a viable future and economic collapse.

"Climate change is a global problem which requires global cooperation", says Chapple. "We cannot expect developing countries to play their part if insurers refuse to support their economies by offering cover against the impacts of climate change."

A more general problem is the focus of current insurance strategies on short-term risk. Few are equipped to take into account the physical, regulatory or market impacts of climate change. And even fewer reward businesses for taking action to reduce greenhouse gas emissions or limit climate risk. On the contrary, some even penalise it. So, for instance, clean energy providers using less proven technology face higher premiums than established producers of fossil fuel power.

Among eight recommendations to the industry, the paper suggests that insurers rate businesses according to how they contribute to climate risk. One possibility would be a 'climate premium' to discourage high-carbon activity, and fund action to limit and adapt to climate change. The paper insists on the critical role of the insurance industry in creating a low-carbon economy, and in preventing and managing climate risk. But, says Chapple, cross-industry collaboration and support from government are needed to fulfil this potential.

- Anna Simpson

Responding to the Challenge of Climate Change can be downloaded here: 

Image credits: Elenavolkova / istock

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