Climate & Insurance

IN Numbers

$23tn

Climate risk to the global economy over the next 25 years, slashing global growth by between 11% and 14%.

35%

Insurers’ investment assets exposed to climate risks.

$1.6tn

Value of uninsured property across the US, with some 7% of US homeowners giving up on home insurance altogether.

THE BIG Picture

The insurance industry is hard to love…

Many consumers resent those monthly premiums – at least until something goes wrong. And increasingly, things are going wrong, making a growing number of homes uninsurable. Rising sea levels, intensifying storms, and wildfires – like those that devastated LA – are turning once-valuable properties into liabilities. Property reinsurance premiums increased by 35% in the US in 2023. And 7% of US homeowners have given up on property insurance altogether, leaving an estimated $1.6 trillion in property value at risk – especially in climate high-risk states such as Florida and California. Many properties in Australia, the Global South and elsewhere are also suffering.

Uninsurable homes edge the world towards a 2008-style crash

Uninsurable homes are harder to sell, in some cases making them valueless, and edging the world towards a 2008-style crunch: another event largely prompted by the US residential housing market.

This meeting point of climate change and insurance presents a critical challenge, as insurers rip up their risk models in order to reflect the growing unpredictability of extreme weather, and both states and individuals are forced to invest in floodproofing, hurricane-resistant designs, and wildfire defences.

All of which makes collaboration between environmental stewardship and the insurance industry vital. These events aren’t going away, and financial markets must adapt to survive the coming storm.

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THE BIG Fixes

With the right mindset, insurance can be a climate saviour.

SEE THE FINANCIAL VALUE IN NATURE

More insurers need to see nature as an asset class – part of our global infrastructure. The world economy is highly dependent on the essential services that nature provides – from our food systems to natural resources. It is the most valuable asset class on the planet, contributing an estimated $140 trillion annually to the global economy: more than double the world’s GDP.

Capital needs a home, and with the right incentivisation, that home can be the protection of nature. The emerging market in biodiversity credits points the way, along with more creative instruments, such as endangered species credits. The passing of Article 6 at COP29 may finally restore faith in carbon markets. The key is developing these as assets, not off-sets.

NATURE-BASED SOLUTIONS

The insurance industry globally is worth around $9tn, representing about 7% of the planet’s GDP. But climate change is increasingly making its models unworkable, so, how can it influence climate resilience?

Risk mitigation is the core of the insurance world. It starts with knowing the facts – and the facts are terrible. One in eight Europeans now live in an area at risk of flooding, according to the European Environment Agency, while the number of people affected by tropical cyclones – which are expected to become more intense and frequent – nearly doubled between 2002 to 2019.

Increasingly, there is a strong financial case for insurers to invest in nature-based solutions. Funding wetlands projects, for example, can see flood waters seep into soil instead of homes, saving vast sums in payouts.

INSURANCE-DRIVEN INNOVATION

The industry thrives on data. With facts to hand, insurers know more about how to tackle the pain points that demand their attention. There is nothing new to this: in the past, earthquake-proof buildings in Japan emerged partly because insurers could see the likelihood of repeated disasters, and encouraged innovation and investment to create more flexible building structures. Insurance companies can also use their data to help individual consumers and businesses reduce their risk. For example, in Australia, cyclone-resistant garage doors have been developed after data identified wind pressure as a primary cause of damage.

INCENTIVISE GREEN CONSUMER HABITS

Insurance can also influence individual behaviour for the better. For example, motor insurers can offer reduced premiums for efficient driving and reduced miles, with carbon offsets for the miles driven. This approach could also support the push to retrofit our built environment – another key battle in the fight to reduce carbon emissions. In the UK, outdated, drafty homes contribute significantly to emissions. And with the energy sector responsible for about 35% of all global emissions, premiums can be reduced for energy-efficient homes.

Among the world’s largest institutional investors, insurance companies can also throw their weight around in pursuit of sustainable causes. The UK insurance industry alone manages investment of £1.8 trillion, around 15% of the UK’s total net worth, according to ABI, so the way it invests really does matter.

NEW FINANCIAL MODELS

Financial innovation is another lever. For example, countries in Asia and the Pacific are increasingly exposed to natural catastrophes that claim human lives and cause substantial economic losses: the frequency of disasters in the region has roughly doubled since 1950 and the annual costs have increased nearly sevenfold from the 1980s to the 2010s. Catastrophe bonds are one important solution that can raise new finance to cover against such disaster risks.

The financial case is strong for nature-based solutions

DEVELOP COMMUNITY INSURANCE

Community insurance models allow residents in high-risk areas to pool resources and ensure coverage where traditional insurers hesitate. Public-private partnerships can also make premiums more affordable for low-income communities, extending coverage and reducing their vulnerability to financial shocks.

Whatever else happens, a broader collaboration between insurers, governments, and global institutions is vital. International frameworks, such as those developed by the International Association of Insurance Supervisors (IAIS), help standardise climate-related risk assessments. By aligning efforts, the industry can address systemic vulnerabilities while promoting innovative solutions.

The insurance sector has a pivotal role in the fight against climate change. By embracing these fixes, it can not only protect its own viability but also catalyse widespread resilience, for a more secure and sustainable future.

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CASE STUDY

CALIFORNIA WILDFIRES

The California Wildfire Mitigation Home-hardening Program is a partnership between the California Office of Emergency Services, California Forest and Fire Protection and local communities. It focuses on modifying, strengthening and creating defensible space for homes in high-risk wildfire areas, prioritising vulnerable communities and offering financial help to lower-income households. If an application is accepted by the state, they will fully inspect a home and draft a report explaining the help available and next steps. Any work required will be carried out by contractors and, in most cases, they will not have to pay upfront.

IN Action

The Conduit’s commitment

Through our conference and programming, convene a community to bring this developing issue to the forefront of public and industry discussions, inspiring action and driving policy innovation.

For the industry, our Insurance in a Changing World conference on 13 March gathered hundreds of influential voices to delve deep into policy and industry innovations.

Moving ahead from the conference, we will focus on practical, actionable solutions to the challenges posed by climate change in ways that highlight the role of individuals, specifically in the built environment and housing market resilience, through a year-long series of programming talks.