Although many industries have fought to prevent action on climate change, there's at least one major business that's taking it seriously, according to a recent perspective in Science. Climate change is estimated to cost the world economy $1.2 trillion annually, which is proving to be a stress test for the insurance industry. Lest you think that's a niche concern, insurance accounts for seven percent of the global economy and is the world’s largest industry.

Increasingly, weather and climate related catastrophes are costing insurers. The number of weather-related loss events in North America has nearly quintupled in the past three decades, according to a recent report from MunichRe. Sandy alone cost New York and New Jersey $80 billion, affecting individuals and business, and impacting health. Claims have more than doubled each decade since the 1980s (adjusted for inflation) and paid claims now average $50 billion a year worldwide.

Many insurers are using climate science to better quantify and diversify their exposure, more accurately price and communicate risk, and target adaptation and loss-prevention efforts. They also analyze their extensive databases of historical weather- and climate-related losses, for both large- and small-scale events. But insurance modeling is a distinct discipline. Unlike climate models, insurers’ models extrapolate historical data rather than simulate the climate system, and they require outputs at finer scales and shorter time frames than climate models.

A trio of global initiatives have been developed to respond to the push of shareholders and regulators and the pull of markets: the United Nations Environment Programme Finance Initiative, ClimateWise, and the Kyoto Statement. These in aggregate include 129 insurance firms from 29 countries. Since the mid-1990s, members of the initiative have supported climate research, developed climate-responsive products and services, raised awareness of climate change, reduced in-house emissions, quantified and disclosed climate risks, and incorporated climate change into investment decisions.

In an effort to adapt to climate change and mitigate losses, some insurers are trying to assist vulnerable customers by improving their resilience to a changing climate. Insurers are supporting interventions with benefits for both emissions reduction and adaptation. Many aim to curb green-house gas emissions from homes, businesses, transportation, industry and agriculture. They've brought over 130 products and services for green buildings to market, and introduced more than 65 offerings for renewable energy systems. Many pay claims that fund rebuilding to a higher level of energy efficiency after losses.

But climate change may end up impacting insurance policy and governance. When risks are too great or undefined, insurers tighten availability, increase prices, and modify terms of coverage. They often end up dually exposed, to both internal risks such as underestimating climate-related losses, and the risks taken by their customers. More than one in four corporate directors anticipate liability claims stemming from climate change. They have responded with new liability products, and by excluding climate-change claims where customer behaviors are unnecessarily risky.

But the insurance industry’s steps towards climate change mitigation and adaption are necessarily going to be limited, and the risks of climate change my eventually become uninsurable. And it seems that many companies are struggling to define their approach. Mandatory risk disclosures identified a broad consensus on the relevance of climate change among insurers in the United States, but only one in eight companies has a formal strategy.

Insurers publicly voiced concern about human-induced climate change four decades ago, and have warned that loss-prone development is unsustainable. Lloyds of London views climate change as the industry’s number one issue.

￼Science, 2012. DOI: 10.1126/science.1229351 (About DOIs).