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Insurers Need to Address Climate Change By Building Windmills, Not Walls

No industry stands to gain -- or lose -- more from climate change than the insurance industry.

Yet insurers and reinsurers have dragged their heels in response. This, however, will soon change as events unfold that will inevitably lead insurers to greater involvement with this issue.     

The National Association of Insurance Commissioners, for example, recently adopted a climate change risk disclosure policy for companies with annual premiums greater than $500 million. Under this policy, insurers must disclose the financial risk of climate change and report on the actions they are taking to respond to those risks beginning in 2010.  

The Environmental Protection Agency has also issued a proposed finding declaring climate change an enormous problem, in both magnitude and probability. The greenhouse gases responsible for causing climate change "endanger public health," the EPA said.  As a result, if Congress, which is currently debating a climate change bill (PDF), fails to regulate greenhouse gases, the EPA will. Regulating greenhouse gases will impact numerous policyholders and force insurers to find ways to assist them, or run the risk of alienating their customer base.     

Furthermore, many business leaders are waking up to the threat posed by climate change. Insurers who still cling to the notion that there is a significant scientific debate about global warming and its cause will shortly discover that their customers have moved on.  For example, 500 CEO’s and other business leaders recently met in Copenhagen and declared in a statement their support of scientific evidence put forth by the Intergovernmental Panel on Climate Change (IPCC) and are "concerned that some recent scientific evidence suggests the problem may be worse than many of the IPCC estimates.”

Other business leaders are creating and supporting educational and carbon disclosure projects to address climate change. The influential Washington D.C.-based Business Roundtable, for instance, has launched a Climate Resolve Initiative to educate businesses on how to voluntarily reduce greenhouse gas emissions and buy offsets.

Finally, with the number of fires, severe storms, flooding, and higher storm surges increasing, it will only be a matter of time before scientists can convince the public there is a connection between the rise in catastrophic events and climate change.  As the public accepts this development, policyholders will begin clamoring for insurers to assist them with new risk management tools and insurance products.  Insurers that begin devoting resources and intellectual capital to climate change now will be in the best position to benefit.  

So what should the industry be doing?
•  First and foremost, the industry must lead by example. The credibility necessary to assist policyholders and sell new products can only come from insurers and reinsurers making a commitment within their own operations to reduce their greenhouse gas emissions. This will require an internal survey of impacts and a plan for reduction. For those scenarios where renewable energy is not an option, companies can buy high-quality carbon offsets.  As part of the commitment companies should educate employees about the challenges posed by climate change.      

Tackling these issues will improve a company’s public image and infuse employees with a sense of mission. Many insurers and reinsurers are run by management teams whose average age is 50 or above. Climate change, if a consideration at all, is usually seen as a problem that won’t manifest itself for at least 10 or 20 years.  This, of course, is very shortsighted and contradicted by the latest scientific evidence.  

Yet motivating employees in an economic recession is getting harder and harder. A commitment to securing a safer, healthier, and cleaner planet by minimizing the effects of climate change is a concrete way to infuse new life into the industry. After the negative fallout from the AIG bailout and a changed business regulatory environment, reinvigorating the workforce will aid employee retention and attract better candidates to the industry.  Also, as employees interact with policyholders about climate change, ideas for new products and services are bound to evolve and these will help lead to new opportunities.  

•  The industry should then address climate change by educating the public as it currently does for disaster preparedness. This will require companies to become more involved with communities in developing suitable building codes and preparing land use plans.  To be effective, insurers should team up with nonprofit neighborhood and environmental groups already active in addressing climate change in these communities.

Considering that rising seas, stronger hurricanes and greater storm surges will impact a significant amount of the industry’s coastal property business, it becomes evident that to retain this business, insurers can’t be complacent. Otherwise, it is possible that a federal solution will be created and the private market will lose much of that coastal business. It is therefore surprising that initiatives such as Ceres' Resilient Coast Blueprint are not more widely supported by the industry. 

•  Finally, success in crafting insurance solutions for reducing greenhouse gas emissions requires that insurers communicate directly with the EPA and Congress and provide input on climate regulation. It is important that the industry supports and assists policyholders once regulation is enacted, but will be more difficult if the industry fails to provide regulators with its point of view. Likewise, to enhance the public’s understanding of climate change and how to mitigate and adapt to the changes, the industry should support focused research projects with universities, government agencies, and modeling firms.   
Further delay will only impair the industry’s ability to assist society and respond to its customers. Like many environmental issues, if society and the insurance industry wait to act until the full effects of climate change are felt, it will be too late.

This brings to mind an old Chinese proverb:, “When the winds of change blow, some people build walls and others build windmills.”  

So far, the industry has built plenty of walls, but the time has arrived to become more fully engaged and start building windmills.   

Windmill -- CC licensed by Flickr user johnnyalive.


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