When it comes to the fight against climate change, the insurance industry does not normally spring to mind.

It may come as a surprise to learn that the industry is not only one of the world’s biggest investors in fossil fuels, it is also highly exposed to the effects of climate change.

The UK insurance industry is the largest in Europe and the third largest in the world. The industry manages total investments that equate to 25 percent of the UK’s net worth, making it pivotal to our economy.

Managing risk

What makes the insurance industry's relationship with climate change so unique is the fact that the industry is built on the concept of managing risk.

With climate change set to be one of the greatest risks of them all, insurers stand to be impacted in significant and far-reaching ways. The Bank of England’s Prudential Regulation Authority has identified three key areas of risk for the insurance industry,many of which are already happening.

The first of these is known as physical impact risk, which relates to the increasing frequency and severity of extreme weather events across the globe. The specific types of weather events include hurricanes, extreme precipitation, tornadoes, landslides, mudflows, drought, wild fires, heat waves, flash floods and rising sea levels.

Aside from the human impact, which can be devastating, there is the substantial cost of repairing the damage caused by such events. The repair bill for Hurricane Katrina in 2005 was estimated to be £83bn. In 2016, according to Munich Re Insurance, losses from natural disasters worldwide totalled £142bn, only £39bn of which was covered by insurance.

Another side effect of the unpredictable weather patterns is that they will play havoc with future predictions and business modelling. Insurance companies currently rely on historical loss records as a means to guiding underwriting and pricing risks, however with the climate acting in a manner that is increasingly hard to predict, the historical data begins to lose its value.

Fossil fuel divestment

This second area of risk for the insurance industry relates to legal liability. Again this isno longer a future prediction, as litigation cases related to the climate are beginning to become reality.

The most notable example comes from the environmental law firm Client Earth. The firm has already targeted the UK's biggest pension funds with a warning that they could face legal action unless they properly take account of risks to their investment portfolios posed by climate change.

Client Earth has now turned its sights onto the insurance industry, and has already reported three insurance firms to the Financial Conduct Authority for failure to disclose climate risks.

In the United States, the city of San Francisco has potentially become the first US municipal body to try to force insurance companies to stop insuring and investing in fossil fuels, with a resolution entitled “Urging Divestment by Insurance Companies From Coal and Tar Sands Industries”.

Meanwhile, the Paris City Council passed a similar declaration earlier this year. The Council highlighted that major European insurance and reinsurance companies such as SCOR and Generalifirmlysupport, insure and invest in the coal industry in Poland.

Worthless investments

As the reality of the climate change threat strengthens, the threat of litigation is certain to grow. The issue is not unique to insurance, with approximately 900 climate related lawsuits now underway in 24 countries, according to a survey by the United Nations Environment Program.

The third and final area of risk relates to investment and stems from the fact that the insurance industry is one of the world’s biggest institutional investors in fossil fuels.

Fossil fuels were long considered a ‘safe bet’ until climate scientists declared that the bulk of all known reserves had to stay in the ground if humanity is to limit global warming to 1.5ºC. The risk lies in these fossil fuel investments becoming what is known as stranded assets, which essentially means investments in coal, oil and gas could potentially suffer from a sudden and unexpected drop in value as society puts measures in place to prevent their use.

Whether it’s a drop in demand, new legislation or the threat of legal action, the sheer speed and unanticipated manner in which these factors could take hold could, at some point in the not to distant future, render the bulk of the insurance industry’s fossil fuel investments worthless.

In recognising the unique set of risks faced by the insurance industry, it also becomes apparent that the industry possesses an almost unparalleled ability to reduce the impacts of climate change.

Insurance solutions

This potential lies in two key areas. The first relates to the industry’s significant financial influence. By divesting of the vast majority of their fossil fuel assets, insurers could accelerate the process of decarbonisation by switching to low carbon technology. Such is the size and scale of the industry, that this would go a long way towards dramatically improving society’s chances of avoiding effects of catastrophic climate change.

The second area relates to what the insurance industry chooses to insure, or rather, not insure. Coal has been highlighted as the most carbon heavy of all fossil fuels generating not only nearly half of the world’s CO2, but also creating the most atmospheric pollution.

Research by Climate Analytics found that no more new coal projects can be built if we are to achieve the goals of the Paris Agreement, yet there are currently 1,600 planned globally. If the insurance industry was to cease underwriting such intensive fossil fuel production sites it is likely that many of these projects would never go ahead.

Today there are some positive signs from within the insurance industry, with big names such as Allianz recently pledging to immediately withdraw from insuring single coal-fired power plants and coal mines, either in operation or planning.

Unfortunately when it comes to the climate change time horizon, the very industry which could have more impact than any other is clearly not taking action quickly enough. Even the bold pledge by Allianz has significant limitations, as the company also stated it will continue to insure businesses that generate power though multiple fossil fuel sources, including coal, until 2040.

Consumer influence

At the present time, it is very difficult for consumers to apply sustainability criteria when choosing an insurance provider.

Whilst Naturesave has been pushing the sustainability agenda for many years it is no longer alone. Public opinion has now firmly shifted its stance on sustainability, as demonstrated in some recent research by YouGov, which found that almost two-thirds of people think the UK government is not doing enough in adapting to climate change.

More than eight in ten hold the view that fossil fuel companies who knew about climate change early on, yet continue to lobby against taking action, should be held responsible for some of the costs of major weather events.

The poll also revealed that sixty percent of those polled were interested in a financial institution, such as a bank account or pension fund, that considers the climate change impacts of the companies it invests in. A similar number thought investing in fossil fuel companies was risky long-term, and more than half thought such companies could not be trusted to change their business model.

This research highlights a strong belief at Naturesave, that there is now a significant opportunity to create a sustainable low carbon insurance offer, supported by more sustainable and ethical underwriting and investment behaviour.

Other sectors?

Looking at other leading industries, it appears the insurance sector is now lagging behind.

Research conducted by the Asset Owners Disclosure Project highlighted that one in four pension funds is taking tangible action to manage climate risk in their portfolio compared to one in eight insurance companies. The research also highlighted that only 8 percent of insurers have staff dedicated to integrating climate risks into the investment process, compared with 16 percent of pension funds.

Like the insurance industry, the banking sector is closely linked to the fossil fuel industry, and has also come under criticism from the Bank of England’s Prudential Regulation Authority. However, the banking sector is now offering ethical and sustainable personal banking choices from brands like Triodos, the Co-op and the Ecology Building Society.

In the energy sector, a growing number of start-ups are focusing on what consumers increasingly want: 100 percent green, affordable energy. This is further proof that more consumers want services that do not contribute to climate change.

Recent research from the price comparison website Compare the Market highlighted the fact that three quarters of consumers are willing to spend more money with a provider that uses only renewable sources, over a provider that uses non-renewable sources.

There is no known risk greater than climate change, which makes the industry built on managing risk itself uniquely placed to lead the charge to combat it. With a little nudge from consumers, the insurance industry could make a material difference to all of us.

This Author

Nick Oldridge is a committed environmentalist and responsible for communications at ethical insurance provider Naturesave and its charitable arm, The Naturesave Trust. Stay updated by following @WeAreNaturesave on Twitter.​​​​​​​