Insurance and Climate Change

Regardless your stance on the question of global warming (aka climate change), many segments of our government and economy has taken actions influenced by this issue including the insurance sector.

Climate Change 101

 Though there are many skeptics, the premise of climate is that the earth's overall temperate has shown a steady, increase in average temperature as measured in the air, land and, most noticeably, in the earth's oceans. While our planet's climate has shown a history of dramatic changes over, the current climate change is driven by one primary reason, a substantial rise in the level of Carbon Dioxide (CO2) in the atmosphere.

The most severe point of contention with regard to climate change is why CO2 levels have risen. As the increases appear to have taken place after the arrival of modern, industrial society, the source has been tracked to the long-term, heavy emissions of billions of tons of CO2 created by the burning of oil and coal in homes, businesses and vehicles. CO2 is a gas which is very efficient at absorbing heat, turning the world into one, large greenhouse.

Impact

While the idea of warmer temperatures may sound inviting, it causes many issues that affect the world's livability. Temperature increases have a significant effect on weather. Warmer temperatures can increase the frequency in which major storms are created and also make them more powerful. Higher temperatures can shift wind patterns and wind activity creating droughts in some areas and rains and floods in others. Warmer waters also melt ice, decreasing the amount of the earth's surfaces which, normally, reflect heat back into the atmosphere. The loss of ice also contributes to a rising sea level which threatens coasts and their inhabitants.

The insurance sector is affected by climate change in several major ways including the following:

  • the losses the sector sustains due to exposure to more frequent and more severe catastrophic weather
  • Regulatory, social, economic and financial pressure to mitigate the effects of climate change
  • Costs in developing, distributing and monitoring new products that support the efficient use of resources (sustainability)

One major issue faced by insurers is that governments, regulators, competitors and consumers have created various levels of pressure to become more conscious of sustainability. Today, insurance companies scrutinize their investment choices, such as whether they support environmentally friendly alternative energy producers or, at least reconsider how heavily they invest in oil and coal producers.

Insurers, to protect themselves, will likely guard against higher unpredictability by seeking higher amounts of reinsurance. While reinsurance will protect against catastrophic loss, greater levels of reinsurance comes at a higher cost.

Currently, more insurers have either created or are developing policies and policy options that favor sustainability. For instance, credits or lower premiums may be used on electric vehicles, commercial buildings that use solar power, apartments that include green roofs, etc.

Climate change? For insurers, it's changing the game on how they operate.


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