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Climate change and P&C insurance: The threat and opportunity

Many in the property and casualty insurance industry have underestimated the immediacy of physical—and systemic—effects from climate change. Business models must adapt.

The effects of climate change are here. Stronger and more frequent natural disasters, for example, are destroying homes and businesses at record-breaking rates and putting entire food systems at risk. Hurricane Harvey caused $125 billion in economic damage in 2017. The 2019–20 Australian bushfires killed more than a billion animals and caused more than $4.4 billion in damage. Climate-linked issues, such as extreme heat, natural disasters, and biodiversity loss—and the failure to respond to these challenges in time—dominate reports issued by organizations such as the World Economic Forum.1 Further changes in the global climate are locked in for at least the next ten years, and insurers’ concerns are no longer individual catastrophic events but the interactions between the global climate and human systems.

At first glance, the effects of climate change may not seem detrimental to property and casualty (P&C) insurers. They can use the annual policy cycle and their sophisticated understanding of evolving risks to reprice and rearrange portfolios to avoid long-term exposure to climate events. And the growth in the value at risk—and possibly volatility—should increase the demand for new and different insurance solutions and services, which, in turn, could expand the industry’s opportunities.

Insurers, however, must be careful not to underestimate the true threat of climate change. Because its effects are systemic, climate risk is likely to stress local economies and—more grimly—cause market failures that affect both consumers and insurers. More frequent catastrophic events, in combination with the need to meet evolving regulatory requirements, can threaten company business models—and make insuring some risk unaffordable for customers or unfeasible for insurers.

Stakeholders—such as customers, shareholders, and regulators—are therefore likely to demand that insurance solutions go beyond traditional risk transfer to explicitly address risk mitigation. These risks can be either physical, directly affecting the insurance business, or transitional, affecting insurers’ portfolios as assets are repriced. Insurers should seize this moment to stress-test their exposure to climate risk and rebalance their portfolios. Perhaps more importantly, insurers should use their understanding of risk to help organizations mitigate and adapt—and thus protect a greater share of the global economy. In particular, the industry should develop products that cover climate-related risk specifically and should revisit its (potentially carbon-intensive) investment strategies. The effects of climate change are already here, and efforts to respond at scale will take time. With the long-term viability of the industry at stake, insurers should act now.