This blog was authored by Talley Burley, Manager, Climate Risk & Insurance; Carolyn Kousky, Associate Vice President for Economics and Policy; and Leslie Labruto, Managing Director, Sustainable Finance.
This is the first in a multi-part series on how insurers can support the energy transition. The series will explore opportunities and challenges and highlight emerging insurance innovations. This will help us build a greater understanding about how the insurance industry, long overlooked as a potential core contributor, can drive emissions reductions. In this first post of the series, we discuss tools that are available to insurers to support the energy transition.
You’ve heard this before. Climate change-driven events — wildfires, hailstorms, tornadoes, hurricanes, and floods — have devastated lives and communities across the country, straining local economies and households as infrastructure, homes, and other personal effects are damaged and destroyed. Mounting costs from extreme weather events have significantly impacted the insurance industry, leading to rising costs and leaving many without sufficient insurance coverage to rebuild. In 2023 natural hazards accounted for $250 billion in economic losses, with insurers and reinsurers paying $95 billion globally. According to a report by SwissRe, insured losses from natural hazards have grown by about 5-7% annually since 1992. Human-driven climate change will continue to lead to more intense and frequent natural hazards. Global greenhouse gas emissions have increased by about 8% since 1990, and today those emissions are the highest they have been in human history. Without significantly greater efforts to reduce global emissions, climate change will only continue to drive costs and strain the insurance sector.
What will it take to reverse these trends? Transformational action and an all-hands-on-deck approach from market sector forces and actors is needed. This includes the insurance industry. While insurance plays a vital role in supporting disaster recovery and resilience, the insurance sector also has a variety of tools and levers it can use to drive the adoption of low-emission, energy-efficient practices.
As the insurance industry faces a period of unprecedented disruption in the face of climate change, insurance markets must evaluate, test and learn from a series of six levers that can make them part of the solution, while also helping their firms, their clients, and their communities remain leaders in innovation and competitiveness.
1. Investing with a climate lens
Insurance companies not only offer financial assistance after a loss, they are also major investors, holding substantial amounts of capital so they can pay out claims. At the end of 2022, the National Association of Insurance Commissioners estimated US insurance companies held cash and invested assets totaling $8.2 trillion. Bonds are typically their largest holding, although insurers may also hold some other assets, such as equities or real estate. Analyses from New York and California insurance regulators found only a very small number of insurers had invested in green bonds. In 2019, one analysis found that investments by United States insurers included $536 billion in fossil-fuel related assets. By applying a climate lens to investments — such as limiting investments in high-carbon assets or actively investing in companies or products that focus on lowering emissions — insurers can ensure their investments are aligned to support decarbonization.
2. Developing climate-aligned underwriting criteria
Underwriting is how insurers decide what to insure and on what terms. Integrating climate considerations into underwriting practices can help the industry support greater climate action through its clients. For example, while insurers are bound by regulation to price based on risk, they can choose to limit coverage to high-emitting industries or place other restrictions on when they offer coverage or the type of coverage they offer. As it relates to climate action, this could involve limiting coverage to only those that undertake specific climate mitigation investments. Chubb, a world leader in insurance, for example, has enacted new underwriting criteria for oil and gas operations to encourage methane emissions reductions. This type of strategy can play an important role in improving the climate performance of insurance company clients.
Clean technology (“clean tech”) is another area of opportunity within underwriting. The clean tech sector represents a growing share of insurance policies, but the cost and availability of insurance for this sector is a growing challenge. Property and casualty insurance costs for clean tech rose by about 45% in 2023 alone. Limited data and performance history can pose specific insurance challenges as new clean technologies come on the market. While existing technologies like wind and solar power are well-established and trusted by insurers, according to research by The Geneva Association, new clean tech products can face data gaps that can make it difficult for insurers to feel comfortable assessing the risk or underwriting for a new product. Creating a shared data commons could help insurers assess risk and potentially increase insurance availability for these technologies.
3. Engaging with clients directly on climate
Policyholders may not always be familiar with the actions they can take to lower emissions within their own operations or buildings without clear technical assistance. Insurers have an opportunity, given their direct engagements with clients and policyholders, to provide advice and guidance on the steps that clients can take to reduce greenhouse gas emissions. For example, Chubb now offers services to help clients understand the types of measures they can implement to reduce methane emissions through consultations and the online Chubb Methane Resource Hub. Technical resources like these can be expanded to include different types of activities and support a wider range of high-emitting policyholders, or even be offered to individual households for homes and other property.
4. Reducing emissions during rebuilding
Insurance helps households rebuild and repair after a disaster. Insurers may be able to use the claims process to better support policyholders in rebuilding more resiliently and sustainably — driving emissions reductions for buildings which currently account for 21% of all GHG emissions.
Energy retrofits can reduce emissions by 32% to 56% according to the American Council for an Energy-Efficient Economy. The cost of these climate retrofits is often in the tens of thousands to hundreds of thousands of dollars, which is well out of reach for many, particularly those with limited access to savings and credit. Post-disaster rebuilding can present an opportunity to incorporate energy improvements and to do so cost-effectively by including them with other needed work.
Insurers could help supply these extra funds during rebuilding so that homes are built back in a more climate-friendly way. One possibility is through so-called endorsements on an insurance policy, optional riders that provide policyholders with additional funding for certain activities during rebuilding. A climate endorsement, for example, could provide additional funding to support the installation of climate-friendly building materials, electrification, energy efficient systems, or certified designs, along with changes that would minimize future damages from extreme weather.
5. Improving operations
Insurance companies, like all firms, can improve the environmental practices of their own day-to-day operations. Beyond general operations, insurers may have opportunities to invest in energy efficient equipment or consider climate impacts in product purchasing. Insurers can use clean energy to power their offices, reduce car and air miles traveled, and incentivize electric vehicle usage. Insurance companies can institute trainings that build employee awareness of environmental practices.
6. Advocating policy changes
An increase in the volume and size of insurance claims will only continue as the climate changes. Without stronger policy action, climate change will continue to drive insurance claim payouts for insurance companies. The insurance industry can take action by voicing their political support for climate policy at the local, state, and federal level. Additionally, they can showcase their support of organizations and candidates who actively work to address the climate crisis and strengthen people’s ability to thrive.
For more discussion on the ways insurers can support climate action, see Leveraging Insurance for Decarbonization.